1、PowerPoint Slides prepared by:Andreea CHIRITESCUEastern Illinois University1010Externalities1ppt课件Externalities Government action can sometimes improve upon market outcomesWhy markets sometimes fail to allocate resources efficientlyHow government policies can potentially improve the markets allocati
2、onWhat kinds of policies are likely to work best2ppt课件Externalities ExternalityThe uncompensated impact of one persons actions on the well-being of a bystanderMarket failure Negative externalityImpact on the bystander is adverse Positive externalityImpact on the bystander is beneficial3ppt课件External
3、ities Negative externalitiesExhaust from automobilesBarking dogs Positive externalitiesRestored historic buildingsResearch into new technologies4ppt课件Externalities and Market Inefficiency Welfare economics:a recapDemand curve:value to consumersPrices they are willing to paySupply curve:cost to suppl
4、iersEquilibrium quantity and priceEfficientMaximizes the sum of producer and consumer surplus5ppt课件Figure 1The Market for AluminumPrice ofAluminumQuantity of Aluminum0Demand(private value)Supply(private cost)The demand curve reflects the value to buyers,and the supply curve reflects the costs of sel
5、lers.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.QMARKETEquilibrium6ppt课件Externalities and Market Inefficiency Negative externalitiesCost to society(of producing a
6、good)Larger than the cost to the good producers“All I can say is that if being a leading manufacturer means being a leading polluter,so be it.”7ppt课件Externalities and Market Inefficiency Negative externalitiesSocial costPrivate costs of the producers(supply)Plus the costs to those bystanders affecte
7、d adversely by the negative externalitySocial cost curve is above the supply curveTakes into account the external costs imposed on society8ppt课件Figure 2Pollution and the Social OptimumPrice ofAluminumQuantity of Aluminum0Demand(private value)Supply(private cost)In the presence of a negative external
8、ity,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.QMARKETOptimumSocial cost(private costand external cost)External Cost QOPTIMUMEquilibrium9ppt课件Externalities and Market Inefficiency Neg
9、ative externalitiesOptimum quantity producedMaximize total welfareSmaller than market equilibrium quantity Government correct market failureInternalizing the externalityAltering incentives so that people take account of the external effects of their actions10ppt课件Externalities and Market Inefficienc
10、y Positive externalitiesEducationBenefit of education is privateExternalities:better government,lower crime rates,higher productivity and wagesSocial value is greater than private valueSocial value curveAbove the demand curve11ppt课件Figure 3Education and the Social OptimumPrice ofEducationQuantity of
11、 Education0Demand(private value)Supply(private cost)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.QMARKETEquilibriumSocial value(privatevalue and external benefi
12、t)External BenefitQOPTIMUMOptimum12ppt课件Externalities and Market Inefficiency Positive externalitiesSocially optimal quantity is greater than market equilibrium quantityGovernment correct market failureInternalize the externalitySubsidy 13ppt课件Externalities and Market Inefficiency Negative externali
13、tiesMarkets produce a larger quantity than is socially desirableGovernment:tax Positive externalitiesMarkets produce a smaller quantity than is socially desirableGovernment:subsidy14ppt课件Technology spillovers,industrial policy,and patent protection Technology spillover=Positive externalityImpact of
14、one firms research and production efforts on other firms access to technological advanceGovernment:internalize the externality Subsidy=value of the technology spillover15ppt课件Technology spillovers,industrial policy,and patent protection Industrial policyGovernment intervention in the economy that ai
15、ms to promote technology-enhancing industries Patent lawProtect the rights of inventors by giving them exclusive use of their inventions for a period of time16ppt课件Public Policies Toward Externalities Command-and-control policiesRegulate behavior directlyRegulation Market-based policies Provide ince
16、ntives so that private decision makers will choose to solve the problem on their ownCorrective taxes and subsidiesTradable pollution permits17ppt课件Public Policies Toward Externalities Regulation Regulate behavior directly:making certain behaviors either required or forbiddenCannot eradicate pollutio
17、nEnvironmental Protection Agency(EPA)Develop and enforce regulationsDictates maximum level of pollution Requires that firms adopt a particular technology to reduce emissions18ppt课件Public Policies Toward Externalities Corrective taxes and subsidiesCorrective taxes(Pigovian taxes)Induce private decisi
18、on makers to take account of the social costs that arise from a negative externalityPlaces a price on the right to polluteReduce pollution at a lower cost to societyRaise revenue for the governmentEnhance economic efficiency19ppt课件Why is gasoline taxed so heavily?Negative externalities associated wi
19、th drivingCongestion,accidents,pollution20ppt课件Why is gasoline taxed so heavily?The gas tax=corrective taxDoesnt cause deadweight lossesMakes the economy work better Less traffic congestion Safer roads Cleaner environment21ppt课件Why is gasoline taxed so heavily?How high should the tax on gasoline be?
20、Most European countries Higher gasoline tax than in the U.S.2007,Journal of Economic LiteratureOptimal corrective tax on gasoline$2.28 per gallon in 2005 dollars$2.70 per gallon in 2012 dollars Actual tax in the U.S.in 2012:50 cents per gallon22ppt课件Why is gasoline taxed so heavily?Tax revenue from
21、a gasoline taxUsed to lower taxes that distort incentives and cause deadweight lossesSome government regulations Production of fuel-efficient cars unnecessary23ppt课件Public Policies Toward Externalities Tradable pollution permitsVoluntary transfer of the right to pollute from one firm to anotherNew s
22、carce resource:pollution permitsMarket to trade permitsFirms willingness to payDepend on its cost of reducing pollution24ppt课件Public Policies Toward Externalities Advantage of free market for pollution permitsInitial allocation of pollution permits doesnt matterIf firms can reduce pollution at a low
23、 cost:Sell whatever permits they getIf firms can reduce pollution only at a high cost:buy whatever permits they needEfficient final allocation 25ppt课件Public Policies Toward Externalities Reducing pollution using pollution permits or corrective taxesFirms pay for their pollutionCorrective taxes:pay t
24、o the governmentPollution permits:pay to buy permitsInternalize the externality of pollution26ppt课件Figure 4The Equivalence of Corrective Taxes and Pollution PermitsPrice ofpollutionIn panel(a),the EPA sets a price on pollution by levying a corrective tax,and the demand curve determines the quantity
25、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.0Quantity ofpollution(a)Corrective Tax(b)Pollution PermitsDemand forp
26、ollution rightsQPCorrective tax1.A corrective tax sets the price of pollution.2.which,together with the demand curve,determines the quantity of pollution.Price ofpollution0Quantity ofpollutionDemand forpollution rightsPQSupply of pollution permits1.Pollution permits set the quantity of pollution.2.w
27、hich,together with the demand curve,determines the price of pollution.27ppt课件Public Policies Toward Externalities Objections to the economic analysis of pollution“We cannot give anyone the option of polluting for a fee.”-by late Senator Edmund Muskie People face trade-offsEliminating all pollution i
28、s impossible Clean water and clean air opportunity costLower standard of living28ppt课件Public Policies Toward Externalities Clean environment is a normal goodPositive income elasticityRich countries can afford a cleaner environment More rigorous environmental protectionClean air and clean water-law o
29、f demandThe lower the price of environmental protectionThe more the public will want it29ppt课件Private Solutions to Externalities The types of private solutionsMoral codes and social sanctionsCharitiesSelf-interest of the relevant partiesIntegrating different types of businessesInterested parties can
30、 enter into a contract30ppt课件Private Solutions to Externalities The Coase theoremIf private parties can bargain without cost over the allocation of resourcesThey can solve the problem of externalities on their own Whatever the initial distribution of rightsInterested parties can reach a bargain in w
31、hichEveryone is better offOutcome is efficient31ppt课件Private Solutions to Externalities1.Dick has the legal right to keep a barking dog.Dick gets a$500 benefit from the dogJane bears an$800 cost from the barkingEfficient outcome:Jane can offer Dick$600 to get rid of the dogDick will gladly accept32p
32、pt课件Private Solutions to Externalities2.Dick has the legal right to keep a barking dog.Dick gets a$1,000 benefit from the dogJane bears an$800 cost from the barkingEfficient outcome:Dick turns down any offer below$1,000Jane will not offer any amount above$800Dick keeps the dog33ppt课件Private Solution
33、s to Externalities3.Jane can legally compel Dick to get rid of the dogDick can offer to pay Jane to allow him to keep the dogIf the benefit of the dog to Dick exceeds the cost of the barking to JaneThen Dick and Jane will strike a bargain in which Dick keeps the dog34ppt课件Private Solutions to Externalities Why private solutions do not always workHigh transaction costsCosts that parties incur in the process of agreeing to and following through on a bargainBargaining simply breaks downLarge number of interested partiesCoordinating everyone is costly35ppt课件
