Lecture 3 Flashcards
What is economic utility?
negative (loud music when going to bed from neighbor) and positive (loud music when partying)
negative utility => costs
the benefit of all is aggregated and defined as COMMUNITY WELFARE
the socially optimal state is reached when the difference between aggregate costs & agg. utility is maximized
=> max. possible utility with min. costs
What is a market failure?
A problem that causes the market economy to deliver an outcome that does not maximize efficiency
=when market is not perfectly efficient (not pareto optimal)
What states the Coase Theorem?
MISSING PROPERTY RIGHTS
Besagt, dass Marktteilnehmer externe Effekte selbstständig internalisieren können, wenn Eigentumsrechte klar verteilt sind, keine transaktionskosten und vollst. Info => mikroökonomische Verhandlungslsg. mit effizienter Ressourcenallokation
INTERNALIZATION of the externality: entweder durch private negotiation oder government action
The misallocation can be solved if the actors negotiate with each other, and property rights exist. Who owns the property rights and to what extent is irrelevant. In every case of
distribution of property rights, an improvement can be expected.
Example for Coase Theorem
Roommates A und B wollen Bier abends trinken und laut quatschen (external effect) und C will schlafen, property rights nicht verteilt
2 Möglichkeiten:
A und B müssen ab 21h still sein => pareto efficient
C muss bis 23h wach sein => pareto efficient
entweder A und B zahlen je 3€ an C und bleiben in der WG oder C zahlt 6€ an A und B und sie gehen aus der WG
=> Buying property rights
both parties are better off, every one benefits and no one is worse off (pareto optimal)
geht nicht darum wer die property rights hat, sondern nur, dass es ausgehandelt wird
What happened?
there was a misallocation. => market failure
Solution: resource (quitness) is made marketable => absorbed into the market and internalized; states intervenes in the market exclusively by assigning property rights
Example for Externalities in Politics
Global Warming
=> kind of market failure
What is an Externality?
Externalities arise whenever actions of one party make another party worse/ better off
yet, 1st party neither bears the costs, nor receives the benefits of doing so
What kinds of Externalities exist?
Positive production externality: when a firm´s production increases the well-being of others but the firm is not compensated by others ( Carbon Capturing for free)
positive consumption externality: firm´s production reduces well-being of others who are not compensated by the firm (pollution from production)
Negative Production externality: when a individual´s consumption increases the well-being of others but the firm is not compensated by others
Negative Consumption externality: individual´s production reduces well-being of others who are not compensated by the individual (smoking at a restaurant)
What is Private Marginal Costs? PMC
PMC
The direct cost to producers of producing an additional unit of a good.
Grafik auf S. 13
What is Social Marginal Costs? SMC
SMC
The private marginal cost to producers plus any costs associated with the
production of the good that are imposed on others.
Grafik auf S.13
What is private and social marginal benefit?
PMB and SMB
Neg consumption externalities drive a wedge between private and social marginal benefit
Private marginal benefit (PMB): The direct benefit to consumers of consuming an additional unit of a
good by the consumer.
- Social marginal benefit (SMB): The private marginal benefit to consumers minus any costs associated
with the consumption of the good that are imposed on others.`
Example:
The loss of health or dining pleasure is a cost of smoking imposed on others.
How do externalities affect efficiency?
Efficiency requires that SMC=SMB (Gesellschaft muss nicht extra für PMB aufkommen)
Automatisch: market sets PMC=PMB (nur wenn es sich vom benefit her für mich lohnt, zahle ich dafür)
when PMC=SMC and PMB=SMB => efficient market
HOWEVER: Production or consumption externalities lead to inefficiency
Beispiel Neg. Externality: Steel Production
x-achse: Quantity
y-achse: price
D= PMB=SMB
S= PMC
JEDOCH: SMC= PMC+ Marginal Damage
SMC höher als PMC (Anzahl Höhe= marginal damage) => PMC Schnittpunkt D und gleich x Koordinate von SMC + Schnittpunkt D und SMC = DEADWEIGHT LOSS(zeigt nach links)
Internalize externality: fishermen could pay steel producer to reduce production (Internalisierung durch Geld)
this removes the inefficiency of the neg. externality
Bsp. Externalities of SUVs
3 types of neg. externalities
- environmental: verbrauchen mehr Sprit
- wear and tear on roads: larger cars wear down the roads more
- safety: avrg. car odds of having a fatal accident quadruple it the accident is with a typical SUV instead of same size
Beispiel pos. Externality
x-achse: Quantity
y-achse: price
D= PMB=SMB
S= PMC
JEDOCH: SMC= PMC - Marginal BENEFIT
PMC höher als SMC (Anzahl Höhe= marginal benefit) => SMC Schnittpunkt D und gleich x Koordinate von PMC + Schnittpunkt D und PMC = DEADWEIGHT LOSS (zeigt nach rechts)
What is certificate trading? Describe.
=Internalization of external effects by means of secuitized rights to damages (neg. externalities)
Certificates are securitized rights to negative externalities.
By holding a certificate, one has the permission to emit a certain amount of pollutants.
The number of certificates is determined by the state and placed on the market.
Allocation of allowances can be done through free distribution or auctioning.
Companies are able to trade certificates among themselves.
The sale of certificates can be a source of income for low-emission companies.
If companies emit a lot, they have to buy many certificates.
When many companies demand allowances, the price increases because they have to be bought from another company.
The price increase of the certificates makes the avoidance of negative externalities more profitable. (weniger CO2 verbrauchen => billiger als Zertifikate einzukaufen=> macht dadurch für U mehr Sinn zu sparen)