ECN101: Externalities

Slide 1:ECN101: Externalities
Define Negative and Positive Externalities Production and Consumption Externalities Solutions Private Government Intervention
Slide 2:Market Efficiency - Market Failures
Recall that: �invisible hand� of the marketplace leads self-interested buyers and sellers in a market to maximize the total benefit that society can derive from a market. But market failures can still happen.
Slide 3:Market Failures: Externalities
When a market outcome affects parties other than the buyers and sellers in the market, side-effects are created called externalities. Externalities cause markets to be inefficient, and thus fail to maximize total surplus.
Slide 4:An externality arises...
. . . when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect. Society�s welfare includes well-being of consumers, producers and bystanders. But consumers and producers neglect the external effects of their actions when deciding the market equilibrium. So equilibrium fails to maximize the total benefit to society as a whole. Car: exhaustSociety�s welfare includes well-being of consumers, producers and bystanders. But consumers and producers neglect the external effects of their actions when deciding the market equilibrium. So equilibrium fails to maximize the total benefit to society as a whole. Car: exhaust
Slide 5:Market Failures: Externalities
When the impact on the bystander is adverse, the externality is called a negative externality. When the impact on the bystander is beneficial, the externality is called a positive externality.
Slide 6:Automobile exhaust Cigarette smoking Barking dogs (loud pets) Loud stereos in an apartment building
Examples of Negative Externalities Creates smog that other people have to breathe measures: set emission standards for cars, tax gasoline to reduce the amount of driving. passive smokers tax cigarette. 4. neighbors disturbed by the noise. Measure: illegal to disturb the peace. Creates smog that other people have to breathe measures: set emission standards for cars, tax gasoline to reduce the amount of driving. passive smokers tax cigarette. 4. neighbors disturbed by the noise. Measure: illegal to disturb the peace.
Slide 7:Restored historic buildings Research into new technologies
Examples of Positive Externalities People walking or riding by can enjoy the beauty and the sense of history. But owners do not get the full benefit of restoration. Govt: regulate destruction of historic buildings and provide tax cut for owners who restore them. creates knowledge that other people can use. Inventors cannot capture the full benefit, so tend to devote too few resources to research. so Govt: patent system: gives investors an exclusive use over their inventions for a period of time.People walking or riding by can enjoy the beauty and the sense of history. But owners do not get the full benefit of restoration. Govt: regulate destruction of historic buildings and provide tax cut for owners who restore them. creates knowledge that other people can use. Inventors cannot capture the full benefit, so tend to devote too few resources to research. so Govt: patent system: gives investors an exclusive use over their inventions for a period of time.
Slide 8:The Market for Aluminum...
Quantity of Aluminum 0 Demand (private value) Supply (private cost) Suppose perfectly competitive market. If there is no externality. Supply curve: height: cost of marginal seller, or the cost to the producer of the last unit of good. Because these ignore costs to society, call these Private Marginal Costs (PMC) Demand curve: Height of demand: willingness to pay of the marginal buyer, or the value to the consumer of the last unit bought. Private marginal benefit of consuming- PMB. Suppose perfectly competitive market. If there is no externality. Supply curve: height: cost of marginal seller, or the cost to the producer of the last unit of good. Because these ignore costs to society, call these Private Marginal Costs (PMC) Demand curve: Height of demand: willingness to pay of the marginal buyer, or the value to the consumer of the last unit bought. Private marginal benefit of consuming- PMB.
Slide 9:The Market for Aluminum and Welfare Economics
The quantity produced and consumed in the market equilibrium is efficient in the sense that it maximizes the sum of producer and consumer surplus.
If the aluminum factories emit pollution (a negative externality), then the cost to society of producing aluminum is larger than the cost to aluminum producers.
For each unit of aluminum produced, the social cost includes the private costs of the producers plus the cost to those bystanders adversely affected by the pollution. MD = Marginal damage to external persons from production social marginal costs (SMC) of producing=PMC+MD MD = Marginal damage to external persons from production social marginal costs (SMC) of producing=PMC+MD
Slide 12:Pollution and the Social Optimum...
Quantity of Aluminum 0 Demand (private value) Supply (private cost) 3 participants: consumer, producer and bystander. The efficient allocation should maximize social benefit. Optimal: amount of aluminum from the standpoint of society as a whole. Maximize social well-being. Q market> Q optimum Below Q optimum, value to consumer>social cost, so increasing quantity will raise social benefit. 3 participants: consumer, producer and bystander. The efficient allocation should maximize social benefit. Optimal: amount of aluminum from the standpoint of society as a whole. Maximize social well-being. Q market> Q optimum Below Q optimum, value to consumer>social cost, so increasing quantity will raise social benefit.
Slide 13:Negative Externalities in Production
The intersection of the demand curve and the social-cost curve determines the optimal output level. The socially optimal output level is less than the market equilibrium quantity. Externalities in production: private cost <> social cost (supply side) Externalities in consumption: private value<> social value (demand side)Externalities in production: private cost <> social cost (supply side) Externalities in consumption: private value<> social value (demand side)
Slide 14:Achieving the Socially Optimal Output
Internalizing an externality involves altering incentives so that people take into account the external effects of their actions.
Slide 15:Achieving the Socially Optimal Output
The government can internalize an externality by imposing a tax on the producer to reduce the equilibrium quantity to the socially desirable quantity. Impose a tax on producers: supply curve shifts upward. If tax=md, then new Q*=Q optimum. ( pollution falls) But this doesn�t consider tax incidence.??Impose a tax on producers: supply curve shifts upward. If tax=md, then new Q*=Q optimum. ( pollution falls) But this doesn�t consider tax incidence.??
Slide 16:Positive Externalities in Production
When an externality benefits the bystanders, a positive externality exists. The social costs of production are less than the private cost to producers and consumers.
A technology spillover is a type of positive externality that exists when a firm�s innovation or design not only benefits the firm, but enters society�s pool of technological knowledge and benefits society as a whole. So social cost of production= private cost � value of technology spillover.So social cost of production= private cost � value of technology spillover.
Slide 18:Positive Externalities in Production...
Quantity of Robots 0 Demand (private value) Supply (private cost) Optimum Q> market Q, so the society would choose to produce a larger quantity. Optimum Q> market Q, so the society would choose to produce a larger quantity.
The intersection of the demand curve and the social-cost curve determines the optimal output level. The optimal output level is more than the equilibrium quantity. The market produces a smaller quantity than is socially desirable. The social costs of production are less than the private cost to producers and consumers.
Slide 20:Internalizing Externalities: Subsidies
Government many times uses subsidies as the primary method for attempting to internalize positive externalities. give subsidy, then private supply curve shifts downward by the size of subsidy. If subsidy=value of technology spillover, then new Q*=Q optimum. give subsidy, then private supply curve shifts downward by the size of subsidy. If subsidy=value of technology spillover, then new Q*=Q optimum.
Slide 21:Internalizing Production Externalities
Taxes are the primary tools used to internalize negative externalities. Subsidies are the primary tools used to internalize positive externalities.
Slide 22:Consumption Externalities...
Quantity of Education 0 Price of Education Q MARKET Demand (private value) Social value Q OPTIMUM (b) Positive Consumption Externality Supply (private cost) Quantity of Alcohol 0 Price of Alcohol Q MARKET Demand (private value) Supply (private cost) Social value Q OPTIMUM (a) Negative Consumption Externality Externalities in consumption: private value<> social value (demand side) Negative: (value to society falls by the size of marginal damage) so demand curve shifts downward. Private output is above social optimal output Positive: value to society rises by the size of marginal benefit. So demand curve shifts upward. Private output is below social optimal output. Externalities in consumption: private value<> social value (demand side) Negative: (value to society falls by the size of marginal damage) so demand curve shifts downward. Private output is above social optimal output Positive: value to society rises by the size of marginal benefit. So demand curve shifts upward. Private output is below social optimal output.
Slide 23:Externalities and Market Inefficiency
Negative externalities in production or consumption lead markets to produce a larger quantity than is socially desirable. Positive externalities in production or consumption lead markets to produce a larger quantity than is socially desirable.
Slide 24:Private Solutions to Externalities
Government action is not always needed to solve the problem of externalities.
Slide 25:Types of Private Solutions to Externalities
Moral codes and social sanctions Charitable organizations Integrating different types of businesses Contracting between parties recycle, do not litter, upkeep the house,.. It�s a good/wrong thing to do Non-profit organizations, e.g. to protect environment. apple and bee. Positive externalities. If one firm own these two businesses, will maximize total benefit to choose optimal number of apple trees and bees. Apple and bee: specify the right number of trees, bees,� perhaps a payment from one party to the other. Both may better off.recycle, do not litter, upkeep the house,.. It�s a good/wrong thing to do Non-profit organizations, e.g. to protect environment. apple and bee. Positive externalities. If one firm own these two businesses, will maximize total benefit to choose optimal number of apple trees and bees. Apple and bee: specify the right number of trees, bees,� perhaps a payment from one party to the other. Both may better off.
Slide 26:The Coase Theorem
The Coase Theorem states that if private parties can bargain without cost over the allocation of resources, then the private market will always solve the problem of externalities on its own and allocate resources efficiently.
Slide 27:The Coase Theorem
Ex: Suppose Rachel and Joey are roommates and Rachel likes to listen to music. The following table shows the private marginal benefit (PMB) and the private marginal cost (PMC) to Rachel of listening to music. However, Joey is not a music fan. The table illustrates the marginal damage (MD) that each hour of music does to Joey
Slide 28:If Rachel makes a decision of how much music to listen to on her own, what will she choose and why?
If music hour changes from 0 to 1, Rachel gets 10 benefit, 0 cost. Marginal damage to Joey is 4 If music hour changes from 0 to 1, Rachel gets 10 benefit, 0 cost. Marginal damage to Joey is 4
Slide 29:If Rachel makes a decision of how much music to listen to on her own, what will she choose and why?
Rachel�s private choice: PMB=PMC
Slide 30:What is the socially optimal level of music? How do you know?
Slide 31:What is the socially optimal level of music? How do you know? Compare PMB to SMC
Socially optimal because PMB=SMC
Slide 32:Why are they different?
Socially optimal because PMB=SMC Rachel�s private choice: PMB=PMC
Slide 33:Why are they different? No one owns the rights to the noise level in the room, so Rachel doesn�t consider the costs to Joey.
Slide 34:Suppose their neighbor Monica has power to assign property rights to the noise level in the apartment.
Slide 35:What if she gives the rights to Joey? Joey owns the right to music/noise in the apartment. If Rachel wants music hours, she can buy it from Joey.
How many hours of music will Joey choose initially?
Slide 36:What if Joey has the rights ?
How many hours of music will Joey choose initially? 0 Can Rachel pay him to listen to more hours?
Slide 37:What was Rachel�s net benefit of the 1st hour?What was the cost to Joey of the 1st hour?Can they agree to a deal?
Depends on cost benefit of the marginal hour of music.Depends on cost benefit of the marginal hour of music.
Slide 38:What was Rachel�s net benefit of the 1st hour? $10What was the cost to Joey of the 1st hour? $4Can they agree to a deal? YES, Rachel can pay Joey enough to get him to listen to the 1st hour of music
Pay <10 and >4, so both are better off.Pay <10 and >4, so both are better off.
Slide 39:What was Rachel�s net benefit of the 2nd hour?What was the cost to Joey of the 2nd hour?Can they agree to a deal?
Slide 40:What was Rachel�s net benefit of the 2nd hour? $6What was the cost to Joey of the 2nd hour? $4Can they agree to a deal? YES
Rachel can give <6 and >4, both better off.Rachel can give <6 and >4, both better off.
Slide 41:What was Rachel�s net benefit of the 3rd hour?What was the cost to Joey of the 3rd hour?Can they agree to a deal?
Slide 42:What was Rachel�s net benefit of the 3rd hour? $4What was the cost to Joey of the 3rd hour? $4Can they agree to a deal? YES
Rachel gives $4 to Joey and plays the music.Rachel gives $4 to Joey and plays the music.
Slide 43:What was Rachel�s net benefit of the 4th hour?What was the cost to Joey of the 4th hour?Can they agree to a deal?
Slide 44:What was Rachel�s net benefit of the 4th hour? $2What was the cost to Joey of the 4th hour? $4Can they agree to a deal? NO-Rachel cannot pay enough
Hours of music if Joey has the property rights
Slide 45:What if she gives the rights to Rachel? Now, Rachel owns the right to music/noise in the apartment. If Joey wants quiet, he can buy it from Rachel.
How many hours of music will Rachel choose initially?
Slide 46:What if Rachel has the rights?
How many hours of music will Rachel choose initially? 5 Can Joey pay her to listen to fewer hours?
Slide 48:What was Rachel�s net benefit of the 5th hour? $0What was the cost to Joey of the 5th hour? $4Can they agree to a deal? YES, Joey can pay Rachel enough to get her not to listen to the 5th hour of music
Joey is willing to pay <$4 to reduce one hour�s music.Joey is willing to pay <$4 to reduce one hour�s music.
Slide 50:What was Rachel�s net benefit of the 4th hour? $2What was the cost to Joey of the 4th hour? $4Can they agree to a deal? YES
Joey can give <$4, >2 to Rachel. Both better off.Joey can give <$4, >2 to Rachel. Both better off.
Slide 51:What was Rachel�s net benefit of the 3rd hour?What was the cost to Joey of the 3rd hour?Can they agree to a deal?
Slide 52:What was Rachel�s net benefit of the 4th hour? $4What was the cost to Joey of the 4th hour? $4Can they agree to a deal? YES
Joey will give $4 to Rachel. (indifferent)Joey will give $4 to Rachel. (indifferent)
Slide 53:What was Rachel�s net benefit of the 2nd hour?What was the cost to Joey of the 2nd hour?Can they agree to a deal?
Slide 54:What was Rachel�s net benefit of the 2nd hour? $6What was the cost to Joey of the 2nd hour? $4Can they agree to a deal? NO - Joey cannot pay enough
Hours of music if Rachel has the property rights
Slide 55:Coase Theorem
Socially efficient number of hours? 3 How many hours of music if Joey has the property rights? 3 How many hours of music if Rachel has the property rights? 3
With low bargaining costs, the private market will reach the efficient outcome on their own. The efficient solution arises no matter who gets the property rights.
Slide 57:Coase Theorem Problems
Need few transaction costs - small number of people Need to be able to identify the source of the externality If speak different language. If benefit of solving the problem > cost of translator, will choose to leave the rpoblem unsolved. Lawyers coordinating everyone is costly. Transaction costs are the costs that parties incur in the process of agreeing to and following through on a bargain. If speak different language. If benefit of solving the problem > cost of translator, will choose to leave the rpoblem unsolved. Lawyers coordinating everyone is costly. Transaction costs are the costs that parties incur in the process of agreeing to and following through on a bargain.
Slide 58:Why Private Solutions Do Not Always Work
Sometimes the private solution approach fails because transaction costs can be so high that private agreement is not possible.
Slide 59:Public Policy Toward externalities
When externalities are significant and private solutions are not found, government may attempt to solve the problem
Slide 60:Public Policy Toward Externalities
Command-and-Control Policies Market-Based Policies Pigouvian Tax Tradeable rights When externalities are significant and private solutions are not found, government may attempt to solve the problem through . . . When externalities are significant and private solutions are not found, government may attempt to solve the problem through . . .
Slide 61:Command-and-Control Policies
Usually take the form of regulations: Forbid certain behaviors. Require certain behaviors. Examples: Requirements that all students be immunized. Stipulations on pollution emission levels set by the Environmental Protection Agency (EPA).
Slide 62:Market-Based Policies
Government uses taxes and subsidies to align private incentives with social efficiency. Pigovian taxes are taxes enacted to correct the effects of a negative externality.
Slide 63:Examples of Regulation versus Pigovian tax
If the EPA decides it wants to reduce the amount of pollution coming from a specific plant. The EPA could� tell the firm to reduce its pollution by a specific amount (i.e. regulation). levy a tax of a given amount for each unit of pollution the firm emits (i.e. Pigovian tax).
Slide 64:Pigovian Tax
Quantity of Aluminum 0 Demand (private value) Supply (private cost) Impose a tax on producers: supply curve shifts upward. If tax=md, then new Q*=Q optimum. ( pollution falls) The government can internalize an externality by imposing a tax on the producer to reduce the equilibrium quantity to the socially desirable quantity. Impose a tax on producers: supply curve shifts upward. If tax=md, then new Q*=Q optimum. ( pollution falls) The government can internalize an externality by imposing a tax on the producer to reduce the equilibrium quantity to the socially desirable quantity.
Slide 65:Pigouvian Tax Problems
Need to know who is creating the externality Need to know the value of the cost -- MD
Slide 66:Pigouvian Tax Distributional Effects
The consumers and producers in the market that creates the externality pay the tax and are worse off.
Slide 67:Pigovian Subsidy
Quantity of Robots 0 Demand (private value) Supply (private cost) Positive externalities. give subsidy, then private supply curve shifts downward by the size of subsidy. If subsidy=value of technology spillover, then new Q*=Q optimum. Government uses subsidies to internalize positive externalities. Positive externalities. give subsidy, then private supply curve shifts downward by the size of subsidy. If subsidy=value of technology spillover, then new Q*=Q optimum. Government uses subsidies to internalize positive externalities.
Slide 68:Market-Based Policies
Tradable pollution permits allow the voluntary transfer of the right to pollute from one firm to another. A market for these permits will eventually develop. A firm that can reduce pollution at a low cost may prefer to sell its permit to a firm that can reduce pollution only at a high cost.
Slide 69:Regulation and Tradable Pollution rights
Example: We want to limit the output of sulfur dioxide (SO2), which causes acid rain. Suppose Wisconsin Power and Light (WP&L) currently emits 13 units of sulfur dioxide and Tennessee Valley Authority (TVA) currently emits 15 units of sulfur dioxide for at total of 28 units. Suppose the government wants to decrease the total units of sulfur dioxide to 22.
Slide 70:Marginal Cost of Eliminating Sulfur Dioxide (S02)
What is marginal cost (MC)? Cost of reducing pollution by one more unit! Increasing MC Increasing MC
Slide 71:Suppose the government regulates that both must reduce pollution to 11 units. Cost of regulation?
Slide 72:Recall WP&L currently emits 13 units and TVA currently emits 15
How many units does WP&L have to eliminate to get down to the gov�t regulated level of 11? 2. How much will that cost? How many units does TVA have to eliminate? 4. How much will that cost?
Slide 73:WP&L currently emits 13 units and TVA currently emits 15
How many units does WP&L have to eliminate to get down to the gov�t regulated level of 11? 2. How much will that cost? 100+200 = 300 How many units does TVA have to eliminate? 4. How much will that cost? 400+500+700+900=2500 Total cost of regulation = 300+2500=$2800
Slide 74:Now suppose each company is given 11 rights to pollute and they are tradable (i.e., one company can buy them from the other)
Who is going to buy permits? Who is going to sell?
Slide 75:A firm that can reduce pollution at a low cost may prefer to sell its permit to a firm that can reduce pollution only at a high cost.
Compare the marginal costCompare the marginal cost
Who is going to buy permits? TVA Who is going to sell? WP&L
Key: if willingness to pay is greater than willingness to accept, sale of permit takes place and we move to the next line!Key: if willingness to pay is greater than willingness to accept, sale of permit takes place and we move to the next line!
Slide 78:Start with 11 permits each, how many units of pollution have they eliminated?
Slide 79:Recall, there are only 22 permits in the economy. If TVA wants to pollute more than 11, how can they? Buy a permit from WP&L!
Slide 80:How much is TVA willing to pay, not to have to reduce the last unit of pollution (from 12 to 11)?How much is WP&L willing to accept to eliminate one more unit of pollution (from 11 to 10)?
TCA: currently eliminated 4. to eliminate 1 less, that is, the 4th. If don�t eliminate the 4th, save the cost 900. so willing to pay<900 WP&L: already eliminated 2. to eliminate 1 more, that is , the 3rd, cost is 300. so ask >300 Key: if WTP>WTA, deal takes place and move to next line. (willing to pay)> (willing to accept)TCA: currently eliminated 4. to eliminate 1 less, that is, the 4th. If don�t eliminate the 4th, save the cost 900. so willing to pay<900 WP&L: already eliminated 2. to eliminate 1 more, that is , the 3rd, cost is 300. so ask >300 Key: if WTP>WTA, deal takes place and move to next line. (willing to pay)> (willing to accept)
Slide 82:Will a deal take place? YES! - Note still only 22 permits in the economy.
TCA: already eliminated 4. to eliminate 1 less, that is, the 4th. If pollute the 4th, save the cost 900. so willing to pay<900 WP&L: already eliminated 2. to eliminate 1 more, that is , the 3rd, cost is 300. so ask >300TCA: already eliminated 4. to eliminate 1 less, that is, the 4th. If pollute the 4th, save the cost 900. so willing to pay<900 WP&L: already eliminated 2. to eliminate 1 more, that is , the 3rd, cost is 300. so ask >300
TCA: already eliminated 3. to eliminate 1 less, that is, the 3th. If don�t eliminate the 3th, save the cost 700. so willing to pay<700 WP&L: already elimated 3. to eliminate 1 more, that is , the 3rd, cost is 450. so ask >450TCA: already eliminated 3. to eliminate 1 less, that is, the 3th. If don�t eliminate the 3th, save the cost 700. so willing to pay<700 WP&L: already elimated 3. to eliminate 1 more, that is , the 3rd, cost is 450. so ask >450
TCA: already eliminated 3. to eliminate 1 less, that is, the 3th. If don�t eliminate the 3th, save the cost 700. so willing to pay<700 WP&L: already elimated 3. to eliminate 1 more, that is , the 3rd, cost is 450. so ask >450 Key: if WTP>WTA, deal takes place and move to next line.(willing to pay)> (willing to accept)TCA: already eliminated 3. to eliminate 1 less, that is, the 3th. If don�t eliminate the 3th, save the cost 700. so willing to pay<700 WP&L: already elimated 3. to eliminate 1 more, that is , the 3rd, cost is 450. so ask >450 Key: if WTP>WTA, deal takes place and move to next line.(willing to pay)> (willing to accept)
Slide 85:Will a deal take place? YES � Note still only 22 permits in the economy.
TCA: currently eliminated 2. to eliminate 1 less, that is, the 2nd. If don�t eliminate the 2nd, save the cost 500. so willing to pay<=500 WP&L: already eliminated 4. to eliminate 1 more, that is , the 4st, cost is 600. so ask >=600 The deal doesn�t take place, since willing to pay<willing to accept. Key: if WTP>WTA, deal takes place and move to next line.(willing to pay)> (willing to accept)TCA: currently eliminated 2. to eliminate 1 less, that is, the 2nd. If don�t eliminate the 2nd, save the cost 500. so willing to pay<=500 WP&L: already eliminated 4. to eliminate 1 more, that is , the 4st, cost is 600. so ask >=600 The deal doesn�t take place, since willing to pay<willing to accept. Key: if WTP>WTA, deal takes place and move to next line.(willing to pay)> (willing to accept)
Slide 88:Will a deal take place? NO � stop at line 3!
TCA: currently eliminated 2. to eliminate 1 less, that is, the 2nd. If don�t eliminate the 2nd, save the cost 500. so willing to pay<=500 WP&L: already eliminated 4. to eliminate 1 more, that is , the 4st, cost is 600. so ask >=600 The deal doesn�t take place, since willing to pay<willing to accept. Key: if WTP>WTA, deal takes place and move to next line.(willing to pay)> (willing to accept)TCA: currently eliminated 2. to eliminate 1 less, that is, the 2nd. If don�t eliminate the 2nd, save the cost 500. so willing to pay<=500 WP&L: already eliminated 4. to eliminate 1 more, that is , the 4st, cost is 600. so ask >=600 The deal doesn�t take place, since willing to pay<willing to accept. Key: if WTP>WTA, deal takes place and move to next line.(willing to pay)> (willing to accept)
Slide 89:From their initial polluting levels:How many did WP&L eliminate? 13-9 = 4 At what cost? How many did TVA eliminate? 15-13 = 2 At what cost?
Slide 90:WP&L eliminated 4 At what cost? 100+200+300+450=1050 TVA eliminated 2 At what cost? 400+500=900Total Cost = 1050+900 = 1950
Slide 91:Which is the lower cost way of eliminating pollution, regulation or tradable pollution rights?
Total cost of regulation: $2800 How? WP&L reduced by 2, TVA reduced by 4 Total cost of tradable pollution rights: $1950 How? WP&L reduced by 4, TVA reduced by 2
Slide 92:Which is more efficient, regulation or tradable pollution rights? Tradable pollution rights!
Total cost of regulation: $2800 How? WP&L reduced by 2, TVA reduced by 4 Total cost of tradable pollution rights: $1950 How? WP&L reduced by 4, TVA reduced by 2
Slide 93:Which is more efficient, regulation or tradable pollution rights? Tradable pollution rights!
Regulations WP&L reduced by 2, TVA reduced by 4 Tradable rights WP&L reduced by 4, TVA reduced by 2 WHY? With tradable pollution rights, the company that can reduce pollution in the least costly way does!
Slide 94:Government Intervention - Establish Property Rights
Externalities lead to inefficiencies because property rights (who owns the good) aren�t clear Example: Rachel and Joey When discussing private solutions, we assume either Rachel and Joey has the property right. When discussing private solutions, we assume either Rachel and Joey has the property right.
With low bargaining costs, establishing property rights is sufficient to lead to an efficient solution. The efficient solution arises no matter who gets the property rights.
Slide 96:Coase Theorem Benefits
Minimum government intervention � just assign property rights: Ex: Government doesn�t need to know the value of the damage being done. Unlike in regulationUnlike in regulation
Slide 97:Coase Theorem Distributional Effects
Person who gets the property rights is better off, person who does not, is worse off.
Slide 98:Summary
When a transaction between a buyer and a seller directly affects a third party, the effect is called an externality. Negative externalities cause the socially optimal quantity in a market to be less than the equilibrium quantity. Positive externalities cause the socially optimal quantity in a market to be greater than the equilibrium quantity.
Those affected by externalities can sometimes solve the problem privately. The Coase theorem states that if people can bargain without a cost, then they can always reach an agreement in which resources are allocated efficiently.
When private parties cannot adequately deal with externalities, then the government steps in. The government can either regulate behavior or internalize the externality by using Pigovian taxes or assign pollution/property rights.

ECN101: Externalities

ECN101: Externalities

Presentation Transcript

Topic 3 – Environmental Externalities of Urban Transportation

Externalities

Chapter 6: Externalities In Action

Introductory Microeonomics

CHAPTER 18 OUTLINE

Is the transition to IPv6 a “market failure” ?

Externalities and Market Inefficiencies

Regulating negative environmental externalities of agriculture

Chapter 18

Externalities

Chapter 3

Network Externalities

Externalities: through the Coase and Pigovan theorems and their implications

Externalities

Externalities

Economics

Chapter 5: Externality policies

EXTERNALITIES

Network Externalities

Public Finance ( MPA405 )

Externalities

6.EXTERNALITIES