3 - Externalities Flashcards
How does externalities related to welfare theorem?
Examples of externalities
Graph:
Negative externalities and deadweight loss
A simple model of externalities: consumers
1) Consumer budget constraint
2) Consumers utility
Equations:
1) Firms maximise profit
2) Individuals maximise utility
3) Private marginal benefits = private marginal cost in equilibrium
1) List the social welfare equation
2) Perturbation argument
Solutions to externalities
Explain Coasian Bargaining
Coase Theorem
Limits to Coasian Bargaining
1) When should the government intervene in cases externalities?
2) Types of public solutions to externalities
3) What do the methods differ in?
1) Explain Pigouvian taxation
2) Practical limitations
Graphically show pollution tax
1) Explain Regulation as a public sector solution
2) Advantages and disadvantages
Show allocative inefficiency with heterogenous cost under Regulation as a public sector solution
- Efficient regulation requires knowing each firm’s cost function
- Cap-and-trade and taxation both avoid this
Explain permits/cap-and-trade as a public sector solution
Explain cap-and-trade equilibrium graphically
What information do we need to know to determine the solutions for externalities in reality?
General issues with survey data
Explain house price capitalization
Explain the model of capitalization
Explain the experiment regarding air quality and house price
Explain the experimental result regarding air quality and house prices
Explain internalities
The UK recently introduced a tax on sugary drinks. Without any graphs or maths but using what you have learned, explain intuitively why this policy might have been introduced.
(MT PS3)
Think about:
1) The market for flu vaccinations
2) The market for coal energy
What kind of externalities arise, and why?
Use the concept of marginal cost for the different parties in your answer, and illustrate using a diagram. Clearly indicate the socially optimal outcome, the competitive equilibrium and the size of the inefficiency.
(MT PS3)
Explain why a Pigouvian tax can remedy the inefficiency arising from positive and negative externalities and illustrate using your diagram under (a).
1) What in the firm’s or consumer’s maximization problem changes with the introduction of a tax?
2) What practical concerns might determine whether Pigouvian taxes are feasible?
Discuss.
(MT PS3)
Draw a diagram describing the marginal benefits and marginal costs of abating a negative consumption externality.
(MT PS3)
Explain why, if there is no uncertainty, it does not matter whether government chooses a price (tax) and allows the market to set quantity, or choose a quantity (of permits to be auctioned) and allows the market to set the price.
(MT PS3)
MT PS3
- The choice of a price (Pigouvian taxation) or of a quantity instrument (regulation) will matter in the presence of uncertainty.
- Below we consider the case of uncertainty regarding the production side, with 2 possible MC curves, and we then consider different scenarios for the environmental consequences of production.
- The first case could be assimilated to global warming - where production activity does not have a direct significant effect, hence the flat aspect of the MD curve.
- The second case can be interpreted as a Nuclear leakage.
- Whilst in the first case, a price instrument should be preferred to minimise the DWL, such conclusion is reversed in the second one.
