Chapter 10. Externalities

Сентябрь 11, 2022

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Экономика
Chapter 10. Externalities

Содержание

2. Externalities Externality The uncompensated impact of one person’s actions on the well-being of a bystander Market
3. Externalities Examples of negative externalities: Exhaust from automobiles Barking dogs Examples of positive externalities: Restored historic
4. Externalities and Market Inefficiency Externalities Cause markets to allocate resources inefficiently Welfare economics: a recap Demand
5. The market for aluminum 1 The demand curve reflects the value to buyers, and the supply
6. Externalities and Market Inefficiency Negative externalities Pollution Cost to society (of producing aluminum) Larger than the
7. Pollution and the social optimum 2 In the presence of a negative externality, such as pollution,
8. Externalities and Market Inefficiency Negative externalities Optimum quantity produced Maximize total welfare Smaller than market equilibrium
9. Externalities and Market Inefficiency Positive externalities Education Benefit of education – private Externalities: better government, lower
10. Education and the social optimum 3 In the presence of a positive externality, the social value
11. Externalities and Market Inefficiency Positive externalities Socially optimal quantity Greater than market equilibrium quantity Government –
12. Externalities and Market Inefficiency Negative externalities Markets - produce a larger quantity than is socially desirable
13. Technology spillover = Positive externality Impact of one firm’s research and production efforts on other firms’
14. Public Policies Toward Externalities Command-and-control policies: regulation Regulate behavior directly Making certain behaviors either required or
15. Public Policies Toward Externalities Market-based policies Provide incentives Private decision makers - choose to solve the
16. The gas tax = corrective tax Three negative externalities Congestion Accidents Pollution Doesn’t cause deadweight losses
17. How high should the tax on gasoline be? Most European countries Gasoline taxes - much higher
18. Public Policies Toward Externalities Market-based policies 2. Tradable pollution permits Voluntary transfer of the right to
19. Public Policies Toward Externalities 2. Tradable pollution permits Advantage of free market for pollution permits Initial
20. Public Policies Toward Externalities Reducing pollution using pollution permits or corrective taxes Firms pay for their
21. The equivalence of corrective taxes & pollution permits 4 In panel (a), the EPA sets a
22. Public Policies Toward Externalities Objections to the economic analysis of pollution “We cannot give anyone the
23. Public Policies Toward Externalities Clean environment - is a normal good Positive income elasticity Rich countries
24. Private Solutions to Externalities The types of private solutions Moral codes and social sanctions Charities Self-interest
25. Private Solutions to Externalities The Coase theorem If private parties can bargain without cost over the
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Слайд 2

Externalities
Externality
The uncompensated impact of one person’s actions on the well-being of

a bystander
Market failure
Negative externality
Impact on the bystander is adverse
Positive externality
Impact on the bystander is beneficial

Слайд 3

Externalities
Examples of negative externalities:
Exhaust from automobiles
Barking dogs
Examples of positive externalities:
Restored historic

buildings
Research into new technologies
Decision maker - fails to account for externalities
Government: protect the interests of bystanders

Слайд 4

Externalities and Market Inefficiency
Externalities
Cause markets to allocate resources inefficiently
Welfare economics:

a recap
Demand curve – value to consumers
Prices they are willing to pay
Supply curve – cost to suppliers
Equilibrium quantity and price
Efficient
Maximizes sum of producer & consumer surplus

Слайд 5

The market for aluminum
1
The demand curve reflects the value to buyers,

and the supply curve reflects the costs of sellers. The equilibrium quantity, QMARKET, maximizes the total value to buyers minus the total costs of sellers. In the absence of externalities, therefore, the market equilibrium is efficient.

Слайд 6

Externalities and Market Inefficiency
Negative externalities
Pollution
Cost to society (of producing aluminum)
Larger than

the cost to the aluminum producers
Social cost - supply
Private costs of the producers
Plus the costs to those bystanders affected adversely by the negative externality
Social cost curve – above the supply curve

Слайд 7

Pollution and the social optimum
2
In the presence of a negative externality,

such as pollution, the social cost of the good exceeds the private cost. The optimal quantity, QOPTIMUM, is therefore smaller than the equilibrium quantity, QMARKET.

Слайд 8

Externalities and Market Inefficiency
Negative externalities
Optimum quantity produced
Maximize total welfare
Smaller than market

equilibrium quantity
Government – correct market failure
Internalizing the externality
Altering incentives so that people take account of the external effects of their actions
E.g.: tax producers
Shift supply upward – by the size of the tax
Tax – value of negative externality

Слайд 9

Externalities and Market Inefficiency
Positive externalities
Education
Benefit of education – private
Externalities: better government,

lower crime rate, higher productivity and wages
Social value – demand
Higher than private value
Social value curve
Above demand curve

Слайд 10

Education and the social optimum
3
In the presence of a positive externality,

the social value of the good exceeds the private value. The optimal quantity, QOPTIMUM, is therefore larger than the equilibrium quantity, QMARKET.

Слайд 11

Externalities and Market Inefficiency
Positive externalities
Socially optimal quantity
Greater than market equilibrium quantity
Government

– correct market failure
Internalize the externality
Subsidy

Слайд 12

Externalities and Market Inefficiency
Negative externalities
Markets - produce a larger quantity than

is socially desirable
Positive externalities
Markets - produce a smaller quantity than is socially desirable
Government: internalize the externality
Taxing goods that have negative externalities
Subsidizing goods that have positive externalities

Слайд 13

Technology spillover = Positive externality
Impact of one firm’s research and production

efforts on other firms’ access to technological advance
Government: internalize the externality
Subsidy = value of the technology spillover
Industrial policy
Government intervention in the economy that aims to promote technology-enhancing industries
Patent law
Protect the rights of inventors by giving them exclusive use of their inventions for a period of time

Technology spillovers, industrial policy, and patent protection

Слайд 14

Public Policies Toward Externalities
Command-and-control policies: regulation
Regulate behavior directly
Making certain behaviors

either required or forbidden
Cannot eradicate pollution
Environmental Protection Agency (EPA)
Develop and enforce regulations
Protecting the environment
Dictates maximum level of pollution
Requires that firms adopt a particular technology to reduce emissions

Слайд 15

Public Policies Toward Externalities
Market-based policies
Provide incentives
Private decision makers - choose to

solve the problem on their own
1. Corrective taxes and subsidies
Corrective tax
Induce private decision makers to take account of the social costs that arise from a negative externality
Places a price on the right to pollute
Reduce pollution at a lower cost to society

Слайд 16

The gas tax = corrective tax
Three negative externalities
Congestion
Accidents
Pollution
Doesn’t cause deadweight

losses
Makes the economy work better
Less traffic congestion, safer roads, and cleaner environment

Why is gasoline taxed so heavily?

Слайд 17

How high should the tax on gasoline be?
Most European countries
Gasoline taxes

- much higher than those in the U.S.
2007 study, Journal of Economic Literature
Optimal corrective tax on gasoline was $2.10 per gallon
Actual tax in the United States: 40 cents
Tax revenue from a gasoline tax
Lower taxes that distort incentives and cause deadweight losses
Some government regulations
Production of fuel-efficient cars – unnecessary

Why is gasoline taxed so heavily?

Слайд 18

Public Policies Toward Externalities
Market-based policies
2. Tradable pollution permits
Voluntary transfer of the

right to pollute from one firm to another
New scarce resource: pollution permits
Market to trade permits
Firm’s willingness to pay
Depend on its cost of reducing pollution

Слайд 19

Public Policies Toward Externalities
2. Tradable pollution permits
Advantage of free market for

pollution permits
Initial allocation of pollution permits
Doesn't matter
Firms - reduce pollution at a low cost
Sell whatever permits they get
Firms - reduce pollution only at a high cost
Buy whatever permits they need
Efficient final allocation

Слайд 20

Public Policies Toward Externalities
Reducing pollution using pollution permits or corrective taxes
Firms

pay for their pollution
Corrective taxes - to the government
Pollution permits, - buy permits
Internalize the externality of pollution

Слайд 21

The equivalence of corrective taxes & pollution permits
4
In panel (a), the

EPA sets a price on pollution by levying a corrective tax, and the demand curve determines the quantity of pollution. In panel (b), the EPA limits the quantity of pollution by limiting the number of pollution permits, and the demand curve determines the price of pollution. The price and quantity of pollution are the same in the two cases.

(a) Corrective tax

(b) Pollution permits

Слайд 22

Public Policies Toward Externalities
Objections to the economic analysis of pollution
“We cannot

give anyone the option of polluting for a fee.” - former Senator Edmund Muskie
People face trade-offs
Eliminating all pollution is impossible
Clean water and clean air – opportunity cost
Lower standard of living

Слайд 23

Public Policies Toward Externalities
Clean environment - is a normal good
Positive income

elasticity
Rich countries can afford a cleaner environment
More rigorous environmental protection
Clean air and clean water - law of demand
The lower the price of environmental protection
The more the public will want
Economic approach
Pollution permits and corrective taxes
Reduces the cost of environmental protection
Increase demand for a clean environment

Слайд 24

Private Solutions to Externalities
The types of private solutions
Moral codes and social

sanctions
Charities
Self-interest of the relevant parties
Integrating different types of businesses
Interested parties – enter a contract

Слайд 25

Private Solutions to Externalities
The Coase theorem
If private parties can bargain without

cost over the allocation of resources
They can solve the problem of externalities on their own
Private economic actors
Can solve the problem of externalities among themselves
Whatever the initial distribution of rights
Interested parties - reach a bargain:
Everyone is better off & Outcome is efficient

Chapter 10. Externalities

Содержание

ExternalitiesExternalityThe uncompensated impact of one person’s actions on the well-being of

ExternalitiesExamples of negative externalities:Exhaust from automobilesBarking dogsExamples of positive externalities:Restored historic

Externalities and Market InefficiencyExternalities Cause markets to allocate resources inefficientlyWelfare economics:

The market for aluminum1The demand curve reflects the value to buyers,

Externalities and Market InefficiencyNegative externalitiesPollutionCost to society (of producing aluminum)Larger than

Pollution and the social optimum2In the presence of a negative externality,

Externalities and Market InefficiencyNegative externalitiesOptimum quantity producedMaximize total welfareSmaller than market

Externalities and Market InefficiencyPositive externalitiesEducationBenefit of education – privateExternalities: better government,

Education and the social optimum3In the presence of a positive externality,

Externalities and Market InefficiencyPositive externalitiesSocially optimal quantityGreater than market equilibrium quantityGovernment

Externalities and Market InefficiencyNegative externalitiesMarkets - produce a larger quantity than

Technology spillover = Positive externalityImpact of one firm’s research and production

Public Policies Toward ExternalitiesCommand-and-control policies: regulation Regulate behavior directlyMaking certain behaviors

Public Policies Toward ExternalitiesMarket-based policiesProvide incentivesPrivate decision makers - choose to

The gas tax = corrective taxThree negative externalities CongestionAccidentsPollutionDoesn’t cause deadweight

How high should the tax on gasoline be?Most European countriesGasoline taxes

Public Policies Toward ExternalitiesMarket-based policies2. Tradable pollution permitsVoluntary transfer of the

Public Policies Toward Externalities2. Tradable pollution permitsAdvantage of free market for

Public Policies Toward ExternalitiesReducing pollution using pollution permits or corrective taxesFirms

The equivalence of corrective taxes & pollution permits4In panel (a), the

Public Policies Toward ExternalitiesObjections to the economic analysis of pollution“We cannot

Public Policies Toward ExternalitiesClean environment - is a normal goodPositive income

Private Solutions to ExternalitiesThe types of private solutionsMoral codes and social

Private Solutions to ExternalitiesThe Coase theoremIf private parties can bargain without

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