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1、,Chapter 18,Externalities and Public Goods,Chapter 18,Slide 2,Topics to be Discussed,Externalities Ways of Correcting Market Failure Externalities and Property Rights Common Property Resources,Chapter 18,Slide 3,Topics to be Discussed,Public Goods Private Preferences for Public Goods,Chapter 18,Slid
2、e 4,Externalities,Negative Action by one party imposes a cost on another party Positive Action by one party benefits another party,Chapter 18,Slide 5,External Cost,Scenario Steel plant dumping waste in a river The entire steel market effluent can be reduced by lowering output (fixed proportions prod
3、uction function),Chapter 18,Slide 6,External Cost,Scenario Marginal External Cost (MEC) is the cost imposed on fishermen downstream for each level of production. Marginal Social Cost (MSC) is MC plus MEC.,External Costs,Firm output,Price,Industry output,Price,Chapter 18,Slide 8,External Cost,Negativ
4、e Externalities encourage inefficient firms to remain in the industry and create excessive production in the long run.,Chapter 18,Slide 9,Externalities,Positive Externalities and Inefficiency Externalities can also result in too little production, as can be shown in an example of home repair and lan
5、dscaping.,Chapter 18,Slide 10,External Benefits,Repair Level,Value,Is research and development discouraged by positive externalities?,Chapter 18,Slide 11,Ways of Correcting Market Failure,Assumption: The market failure is pollution Fixed-proportion production technology Must reduce output to reduce
6、emissions Use an output tax to reduce output Input substitution possible by altering technology,Chapter 18,Slide 12,The Efficient Level of Emissions,Level of Emissions,2,4,6,Dollars per unit of Emissions,0,2,4,6,8,10,12,14,16,18,20,22,24,26,Assume: 1) Competitive market 2) Output and emissions decis
7、ions are independent 3) Profit maximizing output chosen,Why is this more efficient than zero emissions?,Chapter 18,Slide 13,Ways of Correcting Market Failure,Options for Reducing Emissions to E* Emission Standard Set a legal limit on emissions at E* (12) Enforced by monetary and criminal penalties I
8、ncreases the cost of production and the threshold price to enter the industry,Chapter 18,Slide 14,Standards and Fees,Level of Emissions,Dollars per unit of Emissions,Chapter 18,Slide 15,Options for Reducing Emissions to E* Emissions Fee Charge levied on each unit of emission,Ways of Correcting Marke
9、t Failure,Chapter 18,Slide 16,Standards and Fees,Level of Emissions,Dollars per unit of Emissions,Chapter 18,Slide 17,Standards Versus Fees Assumptions Policymakers have asymmetric information Administrative costs require the same fee or standard for all firms,Ways of Correcting Market Failure,Chapt
10、er 18,Slide 18,The Case for Fees,Level of Emissions,2,4,6,Fee per Unit of Emissions,0,1,2,3,4,5,6,7,8,9,10,11,12,13,1,3,5,14,The cost minimizing solution would be an abatement of 6 for firm 1 and 8 for firm 2 and MCA1= MCA2 = $3.,Chapter 18,Slide 19,Advantages of Fees When equal standards must be us
11、ed, fees achieve the same emission abatement at lower cost. Fees create an incentive to install equipment that would reduce emissions further.,Ways of Correcting Market Failure,Chapter 18,Slide 20,The Case for Standards,Level of Emissions,Fee per Unit of Emissions,0,2,4,6,8,10,12,14,16,2,4,6,8,10,12
12、,14,16,Chapter 18,Slide 21,Summary: Fees vs. Standards Standards are preferred when MSC is steep and MCA is flat. Standards (incomplete information) yield more certainty on emission levels and less certainty on the cost of abatement.,Ways of Correcting Market Failure,Chapter 18,Slide 22,Summary: Fee
13、s vs. Standards Fees have certainty on cost and uncertainty on emissions. Preferred policy depends on the nature of uncertainty and the slopes of the cost curves.,Ways of Correcting Market Failure,Chapter 18,Slide 23,Transferable Emissions Permits Permits help develop a competitive market for extern
14、alities. Agency determines the level of emissions and number of permits Permits are marketable High cost firm will purchase permits from low cost firms,Ways of Correcting Market Failure,Chapter 18,Slide 24,Question What factors could limit the efficiency of this approach?,Ways of Correcting Market F
15、ailure,Chapter 18,Slide 25,The Costs and Benefits of Reduced Sulfur Dioxide Emissions,Cost of Reducing Emissions Conversion to natural gas from coal and oil Emission control equipment,Chapter 18,Slide 26,Benefits of Reducing Emissions Health Reduction in corrosion Aesthetic,The Costs and Benefits of
16、 Reduced Sulfur Dioxide Emissions,Chapter 18,Slide 27,Sulfur Dioxide Emissions Reductions,Sulfur dioxide concentration (ppm),20,40,60,0,Dollars per unit of reduction,0.02,0.04,0.06,0.08,Observations MAC = MSC .0275 .0275 is slightly below actual emission level Economic efficiency improved,Chapter 18
17、,Slide 28,Emissions Trading and Clean Air,Bubbles Firm can adjust pollution controls for individual sources of pollutants as long as a total pollutant limit is not exceeded. Offsets New emissions must be offset by reducing existing emissions 2000 offsets since 1979,Chapter 18,Slide 29,Cost of achiev
18、ing an 85% reduction in hydrocarbon emissions for DuPont Three Options 85% reduction at each source plant (total cost = $105.7 million) 85% reduction at each plant with internal trading (total cost = $42.6 million) 85% reduction at all plants with internal and external trading (total cost = $14.6 mi
19、llion),Emissions Trading and Clean Air,Chapter 18,Slide 30,1990 Clean Air Act Since 1990, the cost of the permits has fallen from an expected $300 to below $100. Causes of the drop in permit prices More efficient abatement techniques Price of low sulfur coal has fallen,Emissions Trading and Clean Ai
20、r,Chapter 18,Slide 31,Recycling Households can dispose of glass and other garbage at very low cost. The low cost of disposal creates a divergence between the private and the social cost of disposal.,Ways of Correcting Market Failure,Chapter 18,Slide 32,The Efficient Amount of Recycling,Scrap,Cost,0,
21、4,8,12,Chapter 18,Slide 33,Refundable Deposits,Amount of Glass,$,Price falls to P and the amount of recycled glass increases to M*.,Chapter 18,Slide 34,Externalities and Property Rights,Property Rights Legal rules describing what people or firms may do with their property For example If residents do
22、wnstream owned the river (clean water) they control upstream emissions.,Chapter 18,Slide 35,Bargaining and Economic Efficiency Economic efficiency can be achieved without government intervention when the externality affects relatively few parties and when property rights are well specified.,External
23、ities and Property Rights,Chapter 18,Slide 36,Profits Under Alternative Emissions Choices (Daily),No filter, not treatment plant 500 100 600 Filter, no treatment plant 300 500 800 No filter, treatment plant 500 200 700 Filter, treatment plant 300 300 600,Factorys Fishermens Total Profit Profit Profi
24、t,Chapter 18,Slide 37,Assumptions Factory pays for the filter Fishermen pay for the treatment plant Efficient Solution Buy the filter and do not build the plant,Externalities and Property Rights,Chapter 18,Slide 38,Bargaining with Alternative Property Rights,No Cooperation Profit of factory $500 $30
25、0 Profit of fishermen $200 $500 Cooperation Profit of factory $550 $300 Profit of fishermen $250 $500,Right to Dump Right to Clean Water,Chapter 18,Slide 39,Conclusion: Coase Theorem When parties can bargain without cost and to their mutual advantage, the resulting outcome will be efficient, regardl
26、ess of how the property rights are specified.,Externalities and Property Rights,Chapter 18,Slide 40,Costly Bargaining - The Role of Strategic Behavior Bargaining requires clearly defined rules and property rights.,Externalities and Property Rights,Chapter 18,Slide 41,A Legal Solution - Suing for Dam
27、ages Fishermen have the right to clean water Factory has two options No filter, pay damages Profit = $100 ($500 - $400) Filter, no damages Profit = $300 ($500 - $200),Externalities and Property Rights,Chapter 18,Slide 42,A Legal Solution - Suing for Damages Factory has the right to emit effluent Fis
28、hermen have three options Put in treatment plant Profit = $200 Filter and pay damages Profit = $300 ($500 - $200) No plant, no filter Profit = $100,Externalities and Property Rights,Chapter 18,Slide 43,Conclusion A suit for damages results in an efficient outcome. Question How would imperfect inform
29、ation impact the outcome?,Externalities and Property Rights,Chapter 18,Slide 44,The Coase Theorem at Work,Negotiating an Efficient Solution 1987 - New York garbage spill (200 tons) littered the New Jersey beaches The potential cost of litigation resulted in a solution that was mutually beneficial to
30、 both parties.,Chapter 18,Slide 45,Common Property Resources,Common Property Resource Everyone has free access. Likely to be overutilized Examples Air and water Fish and animal populations Minerals,Chapter 18,Slide 46,Common Property Resources,Fish per Month,Benefits, Costs ($ per fish),Chapter 18,S
31、lide 47,Common Property Resources,Solution Private ownership Question When would private ownership be impractical?,Chapter 18,Slide 48,Crawfish Fishing in Lousiana,Finding the Efficient Crawfish Catch F = crawfish catch in millions of pounds/yr C = cost in dollars/pound,Chapter 18,Slide 49,Crawfish
32、Fishing in Lousiana,Demand C = 0.401 = 0.0064F MSC C = -5.645 + 0.6509F PC C = -0.357 + 0.0573F,Chapter 18,Slide 50,Crawfish Fishing in Lousiana,Efficient Catch 9.2 million pounds D = MSC,Chapter 18,Slide 51,Crawfish Catch (millions of pounds),C Cost (dollars/pound),Crawfish as a Common Property Res
33、ource,Chapter 18,Slide 52,Public Goods,Question When should government replace firms as the producer of goods and services?,Chapter 18,Slide 53,Public Goods,Public Good Characteristics Nonrival For any given level of production the marginal cost of providing it to an additional consumer is zero. Non
34、exclusive People cannot be excluded from consuming the good.,Chapter 18,Slide 54,Public Goods,Not all government produced goods are public goods Some are rival and nonexclusive Education Parks,Chapter 18,Slide 55,Efficient Public Good Provision,Output,0,Benefits (dollars),1,2,3,4,5,6,7,8,10,9,$4.00,
35、$5.50,$7.00,Chapter 18,Slide 56,Public Goods,Public Goods and Market Failure How much national defense did you consume last week?,Chapter 18,Slide 57,Public Goods,Free Riders There is no way to provide some goods and services without benefiting everyone. Households do not have the incentive to pay w
36、hat the item is worth to them. Free riders understate the value of a good or service so that they can enjoy its benefit without paying for it.,Chapter 18,Slide 58,Public Goods,Establishing a mosquito abatement company How do you measure output? Who do you charge? A mosquito meter?,Chapter 18,Slide 5
37、9,The Demand for Clean Air,Clean Air is a public good Nonexclusive and nonrival What is the price of clean air?,Chapter 18,Slide 60,The Demand for Clean Air,Choosing where to live Study in Boston correlates housing prices with the quality of air and other characteristics of the houses and their neig
38、hborhoods.,Chapter 18,Slide 61,The Demand for Clean Air,Nitrogen Oxides (pphm),0,Dollars,1,2,3,4,5,6,7,8,10,9,2000,2500,3000,500,1500,1000,Chapter 18,Slide 62,The Demand for Clean Air,Findings Amount people are willing to pay for clean air increases substantially as pollution increases. Higher incom
39、e earners are willing to pay more (the gap between the demand curves widen) National Academy of Sciences found that a 10% reduction in auto emissions yielded a benefit of $2 billion-somewhat greater than the cost.,Chapter 18,Slide 63,Private Preferences for Public Goods,Government production of a pu
40、blic good is advantageous because the government can assess taxes or fees to pay for it. Determining how much of a public good to provide when free riders exist is difficult.,Chapter 18,Slide 64,Determining the Level of Educational Spending,Educational spending per pupil,$0,Willingness to pay $,$120
41、0,$600,$1800,$2400,The efficient level of educational spending is determined by summing the willingness to pay for education for each of three citizens.,Chapter 18,Slide 65,Determining the Level of Educational Spending,Educational spending per pupil,$0,Willingness to pay $,$1200,$600,$1800,$2400,Wil
42、l majority rule yield an efficient outcome? W1 will vote for $600 W2 and W3 will vote for $1200 The median vote will always win in a majority rule election.,Chapter 18,Slide 66,Question Will the median voter selection always be efficient? Answer If two of the three preferred $1200 there would be ove
43、rinvestment. If two of the three preferred $600 there would be underinvestment.,Private Preferences for Public Goods,Chapter 18,Slide 67,Majority rule is inefficient because it weighs each citizens preference equally-the efficient outcome weighs each citizens vote by his or her strength of preferenc
44、e.,Private Preferences for Public Goods,Chapter 18,Slide 68,Summary,There 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. Pollution can be corrected by emission standards, emissions f
45、ees, marketable emissions permits, or by encouraging recycling.,Chapter 18,Slide 69,Summary,Inefficiencies due to market failure may be eliminated through private bargaining among the affected parties. Common property resources are not controlled by a single person and can be used without a price be
46、ing paid.,Chapter 18,Slide 70,Summary,Goods that private markets are not likely to produce efficiently are either nonrival or nonexclusive. Public goods are both. A 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.,Chapter 18,Slide 71,Summary,Under majority rule voting, the level of spending provided will be that preferred by the median voter-this need not be the efficient outcome.,End of Chapter 18,Externalities and Public Goods,