1、Chapter 18Externalities and Public Goods1Chapter 1Topics to be DiscussednExternalitiesnWays of Correcting Market FailurenExternalities and Property RightsnCommon Property Resources2Chapter 1Topics to be DiscussednPublic GoodsnPrivate Preferences for Public Goods3Chapter 1ExternalitiesnNegativelActio
2、n by one party imposes a cost on another partynPositivelAction by one party benefits another party4Chapter 1External CostnScenariolSteel plant dumping waste in a riverlThe entire steel market effluent can be reduced by lowering output(fixed proportions production function)5Chapter 1External CostnSce
3、nariolMarginal External Cost(MEC)is the cost imposed on fishermen downstream for each level of production.lMarginal Social Cost(MSC)is MC plus MEC.6Chapter 1MCS=MCIDP1Aggregate social cost ofnegativeexternalityP1q1Q1MSCMSCIWhen there are negativeexternalities,the marginalsocial cost MSC is highertha
4、n the marginal cost.External CostsFirm outputPriceIndustry outputPriceMECMECIThe differences isthe marginal externalcost MEC.q*P*Q*The industry competitiveoutput is Q1 while the efficientlevel is Q*.The profit maximizing firmproduces at q1 while the efficient output level is q*.7Chapter 1External Co
5、stnNegative Externalities encourage inefficient firms to remain in the industry and create excessive production in the long run.8Chapter 1ExternalitiesnPositive Externalities and InefficiencylExternalities can also result in too little production,as can be shown in an example of home repair and land
6、scaping.9Chapter 1MCP1External BenefitsRepair LevelValueDIs research and development discouraged by positiveexternalities?q1MSBMEBWhen there are positiveexternalities(the benefitsof repairs to neighbors),marginal social benefitsMSB are higher thanmarginal benefits D.q*P*A self-interested home owneri
7、nvests q1 in repairs.Theefficient level of repairsq*is higher.The higher priceP1 discourages repair.10Chapter 1No filter,not treatment plant 500100600Filter,no damagesCrawfish CatchNegotiating an Efficient Solutionexternalities(the benefitsMarginal Social Cost(MSC)is MC plus MEC.When would private o
8、wnership be impractical?External CostMC increases andCommon Property ResourcesExternalitiesMarginal Social CostWays of Correcting Market FailurenAssumption:The market failure is pollutionnFixedproportion production technologynMust reduce output to reduce emissionsnUse an output tax to reduce outputn
9、Input substitution possible by altering technology11Chapter 1The Efficient Level of EmissionsLevel of Emissions246Dollarsper unitof Emissions02468101214161820222426MSCMCAE*The efficient level ofemissions is 12(E*)where MCA=MSC.Assume:1)Competitive market2)Output and emissions decisions are independe
10、nt3)Profit maximizing output chosenAt Eo the marginalcost of abating emissionsis greater than themarginal social cost.E0At E1 the marginalsocial cost is greaterthan the marginal benefit.E1Why is this more efficientthan zero emissions?12Chapter 1Ways of Correcting Market FailurenOptions for Reducing
11、Emissions to E*lEmission StandarduSet a legal limit on emissions at E*(12)uEnforced by monetary and criminal penaltiesuIncreases the cost of production and the threshold price to enter the industry13Chapter 1Households can dispose of glass and other garbage at very low cost.Efficient SolutionWays of
12、 Correcting Market FailureAssumption:The market failure is pollutionexternalities?the supply of recycledEconomic efficiency improvedof EmissionsLegal rules describing what people or firms may do with their propertyrecycled glassStandards and FeesLevel of EmissionsDollarsper unitof EmissionsMSCMCA312
13、E*StandardFee14Chapter 1nOptions for Reducing Emissions to E*lEmissions FeeuCharge levied on each unit of emissionWays of Correcting Market Failure15Chapter 1TotalAbatement CostCost is less than thefee if emissions were not reduced.Total Feeof AbatementStandards and FeesLevel of EmissionsDollarsper
14、unitof EmissionsMSCMCA312E*Fee16Chapter 1nStandards Versus FeeslAssumptionsuPolicymakers have asymmetric informationuAdministrative costs require the same fee or standard for all firmsWays of Correcting Market Failure17Chapter 1Firm 2s ReducedAbatementCostsFirm 1s IncreasedAbatement CostsMCA1MCA2The
15、 Case for FeesLevel of Emissions246Fee perUnit ofEmissions01234567891011121313514The cost minimizing solutionwould be an abatement of 6for firm 1 and 8 for firm 2 andMCA1=MCA2=$3.3.752.50The impact of a standard ofabatement of 7 for both firmsis illustrated.Not efficient becauseMCA2 MCA1.If a fee of
16、$3 was imposedFirm 1 emissions would fallby 6 to 8.Firm 2 emissionswould fall by 8 to 6.MCA1=MCA2:efficient solution.18Chapter 1nAdvantages of FeeslWhen equal standards must be used,fees achieve the same emission abatement at lower cost.lFees create an incentive to install equipment that would reduc
17、e emissions further.Ways of Correcting Market Failure19Chapter 1ABC is the increasein social cost less thedecrease in abatementcost.MarginalSocialCostMarginal Costof AbatementThe Case for StandardsLevel of EmissionsFee perUnit ofEmissions0246810121416246810121416EBased on incompleteinformation stand
18、ard is 9(12.5%decrease).ADE m*.32Chapter 1Refundable DepositsAmount of Glass$DPrice falls to P and the amount of recycled glass increases to M*.SvSrSThe supply of glass is the sum of the supplyof virgin glass(Sr)and the supply of recycledglass(Sr).M1PWithout refunds the price of glass is P and Sr is
19、 M1.SrSPM*With refunds Sr increasesto Sr and S increases to S.33Chapter 1Externalities and Property RightsnProperty RightslLegal rules describing what people or firms may do with their propertylFor exampleuIf residents downstream owned the river(clean water)they control upstream emissions.34Chapter
20、1nBargaining and Economic EfficiencylEconomic efficiency can be achieved without government intervention when the externality affects relatively few parties and when property rights are well specified.Externalities and Property Rights35Chapter 1Profits Under AlternativeEmissions Choices(Daily)No fil
21、ter,not treatment plant500100600Filter,no treatment plant300500800No filter,treatment plant500200700Filter,treatment plant300300600FactorysFishermensTotalProfitProfitProfit36Chapter 1nAssumptionslFactory pays for the filterlFishermen pay for the treatment plantnEfficient SolutionlBuy the filter and
22、do not build the plantExternalities and Property Rights37Chapter 1Bargaining with Alternative Property RightsNo CooperationProfit of factory$500$300Profit of fishermen$200$500CooperationProfit of factory$550$300Profit of fishermen$250$500Right to Dump Right to Clean Water38Chapter 1nConclusion:Coase
23、 TheoremlWhen parties can bargain without cost and to their mutual advantage,the resulting outcome will be efficient,regardless of how the property rights are specified.Externalities and Property Rights39Chapter 1nCostly Bargaining The Role of Strategic BehaviornBargaining requires clearly defined r
24、ules and property rights.Externalities and Property Rights40Chapter 1nA Legal Solution Suing for DamagesnFishermen have the right to clean waternFactory has two optionsnNo filter,pay damagesnProfit=$100($500$400)nFilter,no damagesnProfit=$300($500$200)Externalities and Property Rights41Chapter 1nA L
25、egal Solution Suing for DamagesnFactory has the right to emit effluentnFishermen have three optionsnPut in treatment plantnProfit=$200nFilter and pay damagesnProfit=$300($500$200)nNo plant,no filternProfit=$100Externalities and Property Rights42Chapter 1nConclusionlA suit for damages results in an e
26、fficient outcome.nQuestionlHow would imperfect information impact the outcome?Externalities and Property Rights43Chapter 1The Coase Theorem at WorknNegotiating an Efficient Solutionn1987 New York garbage spill(200 tons)littered the New Jersey beachesnThe potential cost of litigation resulted in a so
27、lution that was mutually beneficial to both parties.44Chapter 1Common Property ResourcesnCommon Property ResourcelEveryone has free access.lLikely to be overutilizedlExamplesuAir and wateruFish and animal populationsuMinerals45Chapter 1Common Property ResourcesFish per MonthBenefits,Costs($perfish)D
28、emandHowever,private costsunderestimate true cost.The efficient level of fish/month is F*whereMSC=MB(D)Marginal Social CostF*Private CostFCWithout control the numberof fish/month is FC where PC=MB.46Chapter 1Common Property ResourcesnSolutionlPrivate ownershipnQuestionlWhen would private ownership b
29、e impractical?47Chapter 1Crawfish Fishing in LousiananFinding the Efficient Crawfish CatchlF=crawfish catch in millions of pounds/yrlC=cost in dollars/pound48Chapter 1Crawfish Fishing in LousiananDemandnC=0.401=0.0064FnMSCnC=5.645+0.6509FnPCnC=0.357+0.0573F49Chapter 1Crawfish Fishing in LousiananEff
30、icient Catchl9.2 million poundslD=MSC50Chapter 1Crawfish Catch(millions of pounds)CCost(dollars/pound)DemandMarginal Social CostPrivate CostCrawfish as a CommonProperty Resource11.92.109.20.32551Chapter 1Public GoodsnQuestionlWhen should government replace firms as the producer of goods and services
31、?52Chapter 1Public GoodsnPublic Good CharacteristicslNonrivaluFor any given level of production the marginal cost of providing it to an additional consumer is zero.lNonexclusiveuPeople cannot be excluded from consuming the good.53Chapter 1Public GoodsnNot all government produced goods are public goo
32、dslSome are rival and nonexclusiveuEducationuParks54Chapter 1D1D2DWhen a good is nonrival,the social marginalbenefit of consumption(D),is determined byvertically summing the individual demand curves for the good.Efficient Public Good ProvisionOutput0Benefits(dollars)12345678109$4.00$5.50$7.00Margina
33、l Cost$1.50Efficient output occurswhere MC=MB at 2units of output.MB is$1.50+$4.00 or$5.50.55Chapter 1Public GoodsnPublic Goods and Market FailurelHow much national defense did you consume last week?56Chapter 1Public GoodsnFree RiderslThere is no way to provide some goods and services without benefi
34、ting everyone.lHouseholds do not have the incentive to pay what the item is worth to them.lFree riders understate the value of a good or service so that they can enjoy its benefit without paying for it.57Chapter 1Public GoodsnEstablishing a mosquito abatement companylHow do you measure output?lWho d
35、o you charge?lA mosquito meter?58Chapter 1The Demand for Clean AirnClean Air is a public goodlNonexclusive and nonrivalnWhat is the price of clean air?59Chapter 1The Demand for Clean AirnChoosing where to livelStudy in Boston correlates housing prices with the quality of air and other characteristic
36、s of the houses and their neighborhoods.60Chapter 1The Demand for Clean AirNitrogen Oxides(pphm)0Dollars1234567810920002500300050015001000Low IncomeMiddle IncomeHigh Income61Chapter 1The Demand for Clean AirnFindingsnAmount people are willing to pay for clean air increases substantially as pollution
37、 increases.nHigher income earners are willing to pay more(the gap between the demand curves widen)nNational Academy of Sciences found that a 10%reduction in auto emissions yielded a benefit of$2 billionsomewhat greater than the cost.62Chapter 1Private Preferences for Public GoodsnGovernment producti
38、on of a public good is advantageous because the government can assess taxes or fees to pay for it.nDetermining how much of a public good to provide when free riders exist is difficult.63Chapter 1Determining the Levelof Educational SpendingEducational spendingper pupil$0Willingnessto pay$1200$600$180
39、0$2400W1W2W3AWThe efficient level of educational spending is determined by summing thewillingness to pay for education for eachof three citizens.64Chapter 1Determining the Levelof Educational SpendingEducational spendingper pupil$0Willingnessto pay$1200$600$1800$2400W1W2W3AWWill majority rule yield
40、an efficient outcome?W1 will vote for$600W2 and W3 will vote for$1200The median vote will always win in a majorityrule election.65Chapter 1nQuestionlWill the median voter selection always be efficient?nAnswerlIf two of the three preferred$1200 there would be overinvestment.lIf two of the three prefe
41、rred$600 there would be underinvestment.Private Preferences for Public Goods66Chapter 1nMajority rule is inefficient because it weighs each citizens preference equallythe efficient outcome weighs each citizens vote by his or her strength of preference.Private Preferences for Public Goods67Chapter 1S
42、ummarynThere is an externality when a producer or a consumer affects the production or consumption activities of others in a manner that is not directly reflected in the market.nPollution can be corrected by emission standards,emissions fees,marketable emissions permits,or by encouraging recycling.6
43、8Chapter 1SummarynInefficiencies due to market failure may be eliminated through private bargaining among the affected parties.nCommon property resources are not controlled by a single person and can be used without a price being paid.69Chapter 1SummarynGoods that private markets are not likely to p
44、roduce efficiently are either nonrival or nonexclusive.Public goods are both.nA public good is provided efficiently when the vertical sum of the individual demands for the public good is equal to the marginal cost of producing it.70Chapter 1SummarynUnder majority rule voting,the level of spending provided will be that preferred by the median voterthis need not be the efficient outcome.71Chapter 1 End of Chapter 18Externalities and Public Goods72Chapter 1
