Externalities Flashcards
What is the definition of externalities?
- uncompensated impacts of a person’s or institution’s action on the well-being of a bystander
- bystander: neither producer nor consumer $\Rightarrow$ irrelevant to market
- e.g. Anwohner Fraport, Hotel in FFM Innenstadt
- uncompensated: kein monetärer oder anderweitiger Ausgleich
- bystander: neither producer nor consumer $\Rightarrow$ irrelevant to market
What are positive externalities?
convey uncompensated benefit to bystander
- Private Benefit + positive externality=social benefit
- Flughafen Hahn makes business for Bohr Omnibus GmbH
- maintained historical buildings
- vaccinations
What are negative externalities?
- Private Cost + negative externality = social cost
- Fraport increases capacity –> decreases local well-being
- barking dogs
What do producers include in their calculation that is not reflected in external accounting?
- costs that i am not allowed to pay but instead only result from profit
- kalk. Unternehmerlohn
- kalk. Zinsen auf EK
- (kalk. Unternehmensrisiko)
What is the clash of opinion between micro and macro?
- There is a clash of opinions going on betwenn micro and macro:
- micro: Producer surplus maximization
- macro: welfare Maximization
- Any deviation from efficient market leads to welfare loss
What is the difference between market optimum and social optimum?
- Market optimum: result of private market (not considering positive externalities)
- Social optimum: fictive market equilibrium with all positive externalities taken into account
What are the basic rule for externalities?
- increase of welfare as long as additional benefit > additional cost
- consumer takes only marginal private benefits and marginal private costs into account
- externalities are not taken into consideration
#### positive
- externalities are not taken into consideration
- quantity sold on market too little to meet welfare criteria
#### Negative - quantity sold on market too big to meet welfare criteria
What is market failure in context of externalities?
- unregulated market creates deadweight loss because it does not maximise welfare
- called market failure
- government may increase welfare
- e.g.
- investment in infrastructure
- general education
- vaccination
How can the government regulate positive externalities?
- subsidies to demand: demand curve shifts to the right
- Wohngeld, Bildungsgutscheine
- subsidies to supply: supply curve to the right
- private schools
- free or below-cost supply by government
- vaccination
- government enforcement
- basic school education
How can negative externalities be regulated by government?
- taxes: shift cost curve to left
- subsidies suppliers: R&D, investment allowances
- maximum quantities
What is the monetisation of external cost?
- Example: health problems caused by noise translated into costs to be paid by health care system
- negative externalities are often non-monetary, therefore they have to be monetized to be able to be internalized
- major aim to be included in cost-benefit-analysis
What is the internalization of external cost?
- The monetised costs are then to be included in the internal cost calculation of the producer/seller (perpetrator, polluter, etc.Verursacher)
What are the solution mechanisms for externalities?
Private
- social norms, morality, own interest
### why not always working
- Transaction costs, negotiation difficulties, coordination
## market based
### Pigouvian Taxes
- tools that are levied to internalise negative externalities.
- aim is not to create public revenue but to reduce externality
- it aims to get rid of itself / es schafft sich selbst ab
#### incentive
- either investment in stuff that reduces externality or paying pigouvian tax
- tax needs to be higher than cost for reducing contaminant to become economically rational
- Marginal abatement costs < Pigouvian Tax
#### short term
- increase efficiency and government revenue at the same time
What does Metcalf see as the three problems for the harm of emissions?
- calculation at the moment with integrated assessment models (IAMs)
- 3 Problems
- Catastrophes: how to account for highly damaging, but highly improbable development (Ahrtal, Permafrost CO2 relase)
- Damages: How to measure damages to health, agriculture etc.
- Discount rate: how to weigh income today versus income of future generations; low rate = weight on today, high rate= Weight on later
How would one discount for future generations?
- US Office of Management: 7% for 15 years
- not applicable for 200 year horizon
- as there are no “normal” 200 year market investments: no market interest available
- Pigou peer: interest rate should take into account 2 things
- ethical decisions to fuck over future generations for our mistakes
- change in income over time
- UK-economist Ramsay: 1,4%
- Interest rates should decrease over time:
- 4% in near term (1-75 year), 1% in far term (76-300 year)
