WEEK 8 - Externalities Flashcards
When does an externality occur?
when a person’s well-being or a firm’s production capability is directly affect by the actions of other consumers or firms rather than indirectly through changes in prices.
Can be positive or negative
Why is there an overabundance of negative externalities and an under production of positive externalities?
Competitive firms and consumers do not have to pay for the harms of their negative externalities, so they create excessive amounts.
Producers and individuals are not compensated for the benefits of a positive externality, so too little is produced.
Nonoptimal production is the primary result of externalities.
SEE INEFFICIENICIES VIA GRAPH
When is it optimal for society to remove a negative externality?
Not zero,
Optimal to reduce EXTERNALITY (like pollution) until Marginal benefit of further reduction equal to MC
What is a firm’s true social cost?
Private cost plus Cost of harms fro externalities
What is a firm’s private cost?
is the cost of production only (direct costs of labor, energy, and wood pulp), but not the indirect costs of the harm from pollution.
ALL EXTERNALITY COSTS IN NOTES
POSITIVE CONSUMPTION AND PRODUCTION
NEGATIVE CONSUMPTION AND PRODUCTION
What are the 3 ways govt’s intervene to regulate externalities?
Emissions Standard:
Govt limit on amount of pollution released
Emissions Fee:
Tax on air pollution
Effluent Charge:
Tax on discharges into air or waterways
How do these output taxes achieve the social optimum?
Makes the firm internalise their externality or bear cost of harm inflicted on others
-Even if Govt dont know exact lvl of tax to set optimal level
SEE GRAPH AND PIGOVIAN TAX
Of an emissions standard and emissions fee which generates less DWL?
Using Expected MC, emissions fee generates less DWL than emissions standard
How do differing market structures alter the effect of Govt intervention? PT 1
that the monopoly quantity, even with the externality, is less than the socially optimal quantity.
(too little output because it sets p > MC or Monopoly produces too much output because of negative externality)
How do differing market structures alter the effect of Govt intervention? PT 2
Although the competitive quantity always exceeds the social optimum, the monopoly quantity may be less, equal to, or more than the social optimum.
With monopoly, however, welfare is always lower.
What is property right?
exclusive privilege to use an asset.
Extra way to deal with externalities
- If no property right then no price
What does the Coase theorem argue?
The optimal levels of pollution and output can result from bargaining between polluters and their victims if property rights are clearly defined.
Example:
Chemical plant and boat rental company share a small lake
Chemical firm dumps by-products that only smell bad, but are otherwise harmless, into the lake
Boat rental firm’s business is hurt because peoples’ dislike for the smell means they are only willing to rent if the price is low.
What are the 3 ways a government can solve the tragedy of the commons?
- Government can apply a tax or fee for use to force people to internalize the externality.
If fee is less than the marginal externality harm, the externality problem is reduced but not eliminated. - Government can restrict access to the common resource.
First-come, first-served rewards access to those who arrive early rather than those who value resource most. - Government can assign private property rights.
Removes incentive to overuse resource.
What is a public good?
is a commodity or service whose consumption by one person does not preclude others from also consuming it.
By contrast, private goods are rival in consumption
