Topic 11: Externalities

Question 1

failure of FTWE

Answer 1

missing competitive market for every good with prices publicly known

Question 2

private decision

Answer 2

MPB vs. MPC

Question 3

social efficiency

Answer 3

MSB vs. MSC

maximising net benefit to society
- issue that you cannot quantify individual willingness to pay to get rid of a negative externality since they are unable to pay

Question 4

property rights

Answer 4

initial endowments

Question 5

creating markets

Answer 5

initial property rights and trade in the externality good bring it back to the general equilibrium model

FTWE is recovered: system of tradeable rights
- tradeable emissions permits as an example of large-scale market creation
- bring externalities into the market admits scarcity-signaling prices for goods
- property rights might be poorly defined: legal institutions matter
- norms against the trade of some rights

Question 6

quasilinear preferences

Answer 6

horizontal contract curve

unique pareto efficient level of the externality good
- true if agent’s demand doesn’t depend on income

Question 7

coase theorem

Answer 7

if property rights are well-defined and there are no transaction costs of bargaining, then bargaining leads to an efficient outcome

gains left on the table so you bargain to split up gains

Question 8

common property resource

Answer 8

belongs to everyone so non-excludable

Question 9

private decision

Answer 9

with private decision, individual doesn’t account for the fact that everyone else’s returns are lower from their choice

Question 10

intervention for externalities

Answer 10

property rights

quotas

taxes - pigouvian

Question 11

planner’s problem in externality correction

Answer 11

quotas/taxes/assignment of legal rights are equivalent to that of an omniscient planner but are more information-intensive
- uncertainty over the efficient level of the externality makes things difficult

government might not be better informed about the cost of pollution than private parties