Final - Externalities Flashcards
Externalities
When the production or consumption of goods produces side effects that impact bystanders
Social cost
= cost summed across everyone affected by the activity
*We tend to think of these in terms of margins
MSC = MPC + MEC
PC - Costs borne by those engaging in the activity
EC - costs borne by bystanders
Social Benefits
= benefits summed across everyone affected by the activity
*We tend to think of these in terms of margins
MSB = MPB + MEB
PB - Benefits accrued by those engaging in the activity
EB - Benefits accrued by bystanders
Whats the socially optimal level of any activity?
The level at which MSC = MSB
is there any DWL at q*?
naur
Whats the Total social surplus?
Total social benefit - Total social cost
Do markets sometimes fail due to externalities? What happens then
yep
- when producing outside of q*, the markets incur losses (DWL)
- if the losses are significant enough, governments may intervene
- but not always bc intervention is expensive
Assumptions with negative externalities
- MEB = 0
- MEC > 0
- MSC > MPC
Do MEC / MEB increase linearly or exponentially?
Exponentially
–> in MEC, bc pollution is cummulative
Is no one hurt at q*?
People are still hurt at q*, represented by area B graphically, but this is a necesary trade off
Graphical areas negative externalities at q*
TSB = A + B + C
TSC = B + C
TSS = A
DWL = 0
Graphical areas negative externalities at qm
TSB = A + B + C + D + E
TSC = B + C + D + E + F
TSS = A - F
DWL = F
Graphical areas positive externalities at q*
TSB = A + B + C + D + E + F
TSC = C + D + E
TSS = A + B + F
DWL = 0
Graphical areas positive externalities at qM
TSB = A + B + C
TSC = A
TSS = B + C
DWL = F
3 ways of dealing with externalities
- Privately
- Gov –> Taxes
- Gov –> command-and-control policies
Coarse Theorem
The economy will always reach an efficient solution, even with externalities, provided that the costs of making a deal are sufficiently low
Does the coarse theorem work?
no, not rlly. transaction costs are usually too significant
Corrective Taxes
Also called Pigouvian taxes
–> Tax rate should be set equal to MEC at q* in order to reduce quantity output
Corrective subsidies
Also called Pigouvian subsidies
–> Subsidy should be set equal to MEB at q* to boost quantity output
Command-and-control policies
also called environmental standards
regulations that either forbid or require certain behaviours
(max allowed emissions, obligatory emissions control deices, healthcare workers have to wear masks etc)
Are command-and-control policies more efficient?
- sometimes
- they’re seen as more socially popular
- and are easier to implement in bigger groups of people
- but often aren’t the most efficient way of achieving a target
