Week 11 Flashcards
what is an externality?
impact of one agent’s actions on the wellbeing of a bystander
what is a negative externality?
an externality with an adverse impact on the wellbeing of a bystander
what is the market outcome?
MB= private MC
what is the efficient outcome?
MB= Social MC
Social MC = private MC + Marginal External Cost
show social MC and private MC on a graph and DW loss
what is a positive externality?
an externality that has a beneficial impact on the welfare of bystanders
what is the market outcome for positive externalities?
MC = private MB
efficient outcome for positive externalities where
MC = social MB
social MB = Private MB + marginal external benefit
show social MB and private MB on a graph and deadweight loss
how do you remedy externalities?
internalize externalities by
- mergers
- pigouvian tax or subsidy
what is pigouvian emissions tax?
levy unit tax on polluter equal to MEC at the efficient output level
A tax levied on each unit of a polluter’s output in an amount just equal to the marginal damage it inflicts at the efficient level of output
what are issues with tax?
- informational problem
- ignores reciprocal nature of externalities
what are other remedies for externalities?
- command and control regulations
- tradable permits
describe command and control regulations as a way to remedy externalities
can come in the form of government-imposed standards, targets, process requirements, or outright bans. Such measures make certain behaviors either required or forbidden with the goal of addressing the externality . For example, the government may make it illegal for a company to dump certain chemicals in a river
what is the purpose of market-based policies such as taxes and subsidies?
provides incentives for producers to change their behavoiur
why may regulations be difficult to implement?
It requires the regulator to have in-depth knowledge of a certain industry or sphere of economic activity. If done incorrectly, regulation can introduce inefficiency. For example, if the government makes it illegal to dump in the river, the companies and their customers may suffer because the products must be produced using less efficient methods
show graph that internalizes negative externalities
what is coarse theorem
what does this example show?
what are the different combinations? what is the most efficient outcome?
Assignment of property rights
if fishery has right to clean water, what happens?
- S installs filter
- efficient outcome results
Profit for S = 300k, profit for F= 500k
assignment of property rights
if steel factory has the right to pollute, what happens?
Assignment of property rights
describe bargaining case
assuming cost of filter to S is 200k
and Cost of treatment plant to F is 300k
what is the bargaining outcome?
Given if S pollutes, makes profits of $500k
and F with higher catch makes profit of $500k
efficient outcome is reached no matter
efficient outcome is reached no matter who is assigned property rights
what is bargaining assumed to be?
priceless
what does bargaining effect?
distribution of income. That is even though an efficient outcome is achieved, bargaining will affect distribution of income
what are limitations/complications of coase theorem
Transactions costs are almost never 0
what is a rival good?
what is non-rival?
one person’s consumption of a good does limits its availability to others
vice versa
what is an excludable good?
non-excludable good?
prevents another person from using the good
non excludable: impossible or very costly to prevent another person from using the good
distinguish between private and public goods
what about common resources?
private goods are rival and excludable
public goods are non-rival and non-excludable
common resources are rival but non-excludable
for private goods, market demand is
the HORIZONTAL summation of all individual demand curves
what is the efficient provision of public goods?
MB = MC
what is MB of public good?
sum of MB to all customers of that good
determine by VERTICAL summation of individual demand curves
show demand curve for private goods
show how vertical summation of individual demand curves form demand curve for public gods
describe how the non-excludable aspect of public goods create the free-rider problem
because invdividuals cannot be prevented from using the good, individuals receive the benefit of the good without having to pay for its upkeep/cost
why is efficient public provision difficult?
due to problems in determining willingness to pay of customers
when property rights are assigned
invididuals may respond to the externality by bargaining with each other
property rights figure out
Property rights figure out which way the distribution is going. Property rights determine WHO bears the cost
technology standard
command and control regulation that requires polluters to install a certain technology to clean up their emissions.
what is a performance standard
A regulation that sets an emissions goal for each polluter. The polluter frequently has the flexibility to meet this standard in any way it chooses.
deadweight loss from positive externality
deadweight loss from negative externality
when there are no externalities, then
MPB=MSB and MPC=MSC
what is asymmetric information
A situation that occurs when some partcipants in a market have better information about market conditions than others
eg: healthcare, education
example of coase theorem
Firm in a small town plans on opening a factory
-factory will emit pollution (negative externality)
-expected economic profit from factory: $4000 per month
-citizens of town collectively value fresh air at all $5000 per month
Efficient outcome: no factory is built. From societal perspective the costs of building the refinery ($5000 per month) are greater than the benefits ($4000 per month)
If Townspeople own the property rights:
- Townspeople want at least $5000 per month, but factory owners are willing to pay up to $4000 per month
- If townspeople own the property rights then the factory owners would be unable to pay a sufficiently high amount. Factory will not be built: efficient outcome
If firm owns the property rights then the townspeople would have to pay to prevent the factory from being built. Townspeople could pay $4001 which is more than $4000 that the firm would receive if they opened the factory. Factory will not be built: efficient outcome
pigouvian tax
how much tax should be imposed
impose tax equal to the damages that the firm imposes on bystanders: eliminates dead weight loss
If the government levies a tax on pollution
The private cost of pollution to a polluter is less than its social cost. If the government levies a tax on pollution, it increases the polluter’s private cost. The polluter now has an incentive to generate less pollution.
another example of coase theorem
Take another example. The Jones family plants pear trees on their property which is adjacent to the Smith family. The Smith family gets an external benefit from the Jones family’s pear trees because they pick up the pears that fall on the ground on their side of the property line (see ). This is an externality because the Smith family does not pay the Jones family for the utility received from gathering fallen pears. As a result, the Jones family plants too few pear trees. In response, the Jones family can put up a net that will prevent pears from falling on the Smith’s side of the property line, eliminating the externality. Alternatively, the Jones could impose a cost on the Smith family if they want to continue to enjoy the pears from the pear trees. Both parties will be better off if they can agree to the second scenario, as the Smith family will continue to enjoy pears and the Jones family can increase the production of pears.
what is the efficient number of pears to be produced
for positive externality, society’s MB> jones’s MB
here efficient number of pears where MSB=MC so 4 pears
what is a private good
A private good is a scare economic resource, which causes competition for it. Generally, people have to pay to enjoy the benefits of a private good. Because people have to pay to obtain it, private goods are much less likely to encounter a free-rider problem than public goods. Thus, generally, the market will efficiently allocate resources to produce private goods.
what are common goods
This means that anyone has access to the good, but that the use of the good by one person reduces the ability of someone else to use it. A classic example of a common good are fish stocks in international waters; no one is excluded from fishing, but as people withdraw fish without limits being imposed, the stocks for later fishermen are potentially depleted.
