Chapter 18 - Externalities Flashcards
Private benefit and cost of activity x
Maximum monetary amount a person would be willing to pay to do activity x & the cost to that person of doing x
Social benefit and cost of activity x
combined monetary amount people would be willing to pay for activity x and combined cost of x
- ve. externality
Activity that imposes external costs on others (not part of the transaction)
+ve. externality
Activity that imposes external benefits on others
Example with competitive markets - market equilibrium and drawing MSC, MPB and Qs
Find market equilibrium, D = S
- To find MPC, rearrange supply curve for P and add external cost to make MSC
- To find MPB rearrange demand curve
- then social optimum is MSB = MSC
Marginal private cost (MPC)
is the change in the producer’s total cost brought about by the production of an additional unit of a good/service
Example with monopolist
Find equilibrium where MR = MC
- MR = twice as steep as demand curve
- MSB rearrange demand curve
- SMC = SMB
Coarse Theorem
When the parties affected by externalities can negotiate costlessly with one another, an efficient outcome results no matter how the law assigns responsibility for damages
Issues with Coarse Theorem
1) If gov wasn’t involved would people find efficient outcomes?
- requires people to negotiate with relatively low costs
- for many externalities, not satisfied
2) Dividing surplus, how much should P be? between cost and other parties max total benefit
3) Single polluter causes damage to large group - difficult to negotiate (Each person has different incentives)
4) if potential benefits are small may not even be worth it (time & energy required for negotiation)
Liable (in matrix)
Required to compensate to a party for any damage caused
NIMBY (definition)
Residents that think an activity is worthwhile as long as it happens well away from them
Property rights (definition)
Given to parties for whom it is most costly to adjust
- better to define rights = achieve lowest cost of adjustment
Taxation vs Regulation
Tax Approach
concentrates pollution reduction in the hands of the firms that can accomplish it in the least costly way
- achieves efficiency without requiring any knowledge on part of regulators
pollution tax = fee for each unit of pollution they discharge
Direct regulatory approach
Telling each firm how much to reduce pollution
- can also achieve this if regulators knew MRC across all firms
