1 / 25

What did you study last time?

What did you study last time?. Trade—an exporting country Trade—an importing country Arguments against trade. Do you know …. what an externality is? what different types of externalities are? why externalities lead to social inefficiency? what social efficiency means?.

thi
Télécharger la présentation

What did you study last time?

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. CRC Microeconomics

  2. What did you study last time? • Trade—an exporting country • Trade—an importing country • Arguments against trade CRC Microeconomics

  3. Do you know … • what an externality is? • what different types of externalities are? • why externalities lead to social inefficiency? • what social efficiency means? CRC Microeconomics

  4. A. General concepts CRC Microeconomics

  5. 1. An externality • is the uncompensated (spillover) impact of one person's actions on the well-being of a bystander. • occurs 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 impact. • e.g. late night party, flu shot, etc. CRC Microeconomics

  6. 2. What are the different types of externalities? a. Negative externalities - create adverse (bad) impacts. - e.g. exhaust from automobiles, barking dogs, etc. b.Positive externalities - create beneficial (good) impacts. - e.g. restored historic building, research into new technologies, etc. CRC Microeconomics

  7. 3. Why do externalities lead to social inefficiency? • When there are externalities, the market equilibrium fails to maximize the total benefit to society as a whole. • The market becomes socially inefficient. CRC Microeconomics

  8. 4. What is social efficiency? • Social efficiency occurs at Qsoc where the total net benefit (TNB) to society is maximized. • Define: • T = total; N = net; M = marginal • S = social; P = private; E = external • B = benefit; C = cost • e.g. TSB = total social benefit, • MEC = marginal external cost, etc. CRC Microeconomics

  9. 4. What is social efficiency? • Social efficiency occurs at Qsoc where the total net benefit (TNB) to society is maximized. a. Total approach TSB = TPB + TEB TSC = TPC + TEC TNB = TSB – TSC To maximize TNB, society produces Q*soc. CRC Microeconomics

  10. 4. What is social efficiency? b. Marginal approach MSB = MPB + MEB MSC = MPC + MEC MNB = MSB – MSC Maximizing TNB requires that MNB = MSB – MSC = 0 i.e. society produces Qsoc where MSB = MSC. Notes: MSB = Dsoc and MSC = Ssoc MPB = D and MPC = S CRC Microeconomics

  11. 5. What are the effects of externalities on markets? Positive externalities Negative externalities production consumption production consumption research education pollution cigarettes, alcohol, etc. TSC < TPC TSB > TPB TSC > TPC TSB < TPB Qe < Qsoc Qe < Qsoc Qe > Qsoc Qe > Qsoc where Qe = market output; Q*soc = socially optimal output CRC Microeconomics

  12. B. Graphs CRC Microeconomics

  13. B. Graphs • Perfect competition a. General case b. With no externalities • Production externalities a. Negative b. Positive c. Summary CRC Microeconomics

  14. B. Graphs 3. Consumption externalities a. Negative b. Positive c. Summary 4. Market-based solutions to externalities a. Pigovian taxes b. Pollution permits c. Summary CRC Microeconomics

  15. 1a. Perfect Competition Given a perfectly competitive market, where D = MPB and S = MPC. P Perfect competition leads to market efficiency because TS = max. S = MPC E Pe D = MPB Q CRC Microeconomics Qe = Qmarket

  16. 1b. Perfect Competition with no Externality Suppose that there is no externality, i.e. Dsoc = MSB = D and Ssoc = MSC = S. P Perfect Competition + No externality => Social Efficiency (Optimum) S = MPC = Ssoc = MSC E = Esoc Pe = Psoc D = MPB = Dsoc = MSB Q CRC Microeconomics Qe = Qmarket = Qsoc = Qoptimum

  17. 2a. Negative Production Externality Suppose that there is negative production externality, i.e. Dsoc = MSB = D and Ssoc = MSC = S + MEC. Ssoc = MSC P Negative production externality => Social inefficiency; Qsoc < Qe MEC e.g. cost of pollution Esoc S = MPC Psoc E Pe D = MPB = Dsoc = MSB Q CRC Microeconomics Qsoc Qe

  18. 2b. Positive Production Externality Suppose that there is positive production externality, i.e. Dsoc = MSB = D and Ssoc = MSC = S + MEB. P Positive production externality => Social inefficiency; Qsoc > Qe S = MPC MEB E Pe Esoc Ssoc = MSC Psoc D = MPB = Dsoc = MSB Q CRC Microeconomics Qe Qsoc

  19. 2c. Production Externalities-Summary Ssoc P P S S MEC Ssoc Esoc MEB Psoc E E Pe Pe Esoc Psoc D D Q Q Qe Qsoc Qsoc Qe Positive Negative CRC Microeconomics

  20. 3a. Negative Consumption Externality Suppose that there is negative consumption externality, i.e. Dsoc = MSB = D - MEC and Ssoc = MSC = S. P Negative consumption externality => Social inefficiency; Qsoc < Qe S = MPC = Ssoc = MSC E Pe Psoc MEC Esoc D = MPB Dsoc = MSB Q CRC Microeconomics Qsoc Qe

  21. 3b. Positive Consumption Externality Suppose that there is positive consumption externality, i.e. Dsoc = MSB = D + MEB and Ssoc = MSC = S. P Positive consumption externality => Social inefficiency; Qsoc > Qe S = MPC = Ssoc = MSC Esoc Psoc E Dsoc = MSB Pe MEB D = MPB Q CRC Microeconomics Qe Qsoc

  22. 3c. Consumption Externalities-Summary P P Dsoc S S Esoc Psoc Dsoc E E Pe Pe Esoc Psoc MEB MEC D D Q Q Qe Qsoc Qsoc Qe Positive Negative CRC Microeconomics

  23. Now you know … • what an externality is. • what the different types of externalities are. • why externalities lead to social inefficiency. • what social efficiency means. CRC Microeconomics

  24. What will you study next? • What is the basic solution to externalities? • How do people deal with externalities? • How do governments deal with externalities? CRC Microeconomics

  25. See You! Take Care! CRC Microeconomics

More Related