1 chapter 3 externalities and public policy. 2 externalities externalities are costs or benefits of...
TRANSCRIPT
1
Chapter 3
Externalities and Public Policy
2
Externalities Externalities are costs or benefits of
market transactions not reflected in prices. Negative externalities are costs to third
parties. Positive externalities are benefits to third
parties .
3
Externalities and Efficiency
The marginal external cost is the dollar value of the cost to third parties from the production or consumption of an additional unit of a good.
4
Social Costs
MSC = MPC + MEC
5
Figure 3.1 Market Equilibrium, A Negative Externality and Efficiency
MPC + MEC = MSC
Pri
ce,
Ben
efit
, an
d C
ost
(D
oll
ars)
Tons of Paper Per Year (Millions)
D = MSB
S = MPC
5
100 A
105
4.5
B10
110G
6
Positive externalities
The marginal external benefit is the dollar value of the benefit to third parties from an additional unit of production or consumption of a good.
7
Social Benefit
MSB = MPB + MEB
8
Figure 3.2 Market Equilibrium, A Positive Externality and Efficiency
MPB + MEB = MSBH10
V30
12
Pri
ce,
Ben
efit
, an
d C
ost
(D
oll
ars)
Inoculations Per Year (Millions)
0
S = MSC
MPB
U25
10
Z45
9
Figure 3.3 A Positive Externality for Which MEB Declines With Annual Output
S = MSC
S' = MSC'
MPBi
A 25
10
B
12
MPBi + MEB = MSB
16
C 20
20 Pri
ce
, B
en
efi
t, a
nd
Co
st
(Do
llars
)
Inoculations per Year (Millions)
0
F 30
10
Internalization of Externalities An externality can be
internalized under policies that force market participants to account for the costs of benefits of their actions.
11
Corrective Taxes to Negative Externalities
Setting a tax equal to the MEC will internalize a negative externality.
12
Figure 3.4 A Corrective TaxP
rice
, B
enef
it,
and
Co
st (
Do
llar
s)
Tons of Paper Per Year (Millions)
D = MSB
S = MPC
S’ = MPC + T = MSC
T100
5
A
110Net Gains in Well-Being
G
105
95
4.5
Tax Revenue = TotalExternal Costs
B
13
Results of a Corrective Tax Price rises. The tax revenue is sufficient
to pay costs to third parties. Socially optimal levels of
production are achieved.
14
A Polluting Monopolist Monopoly creates a loss to society. A negative externality causes a loss
as well. The losses do not necessarily add
to one another. In fact, they can cancel each other out.
15
Figure 3.5 A Second Best Efficient Solution
MR
Pri
ce
Output per Year 0
MPC + MEC = MSC
D = MSB
MPC
M
M
Q
P A
C
Q*
B
F
16
Theory of the Second Best
When two opposing factors contribute to efficiency losses, the can offset one another’s distortions.
17
Corrective Subsidies Setting a subsidy equal to
MEB will internalize a positive externality.
18
Subsidy Payments
Figure 3.6 A Corrective Subsidy
0
Pric
e, B
en
efit
, an
d C
ost
(D
olla
rs)
Inoculations per Year (Millions)
Y 10 X
D' = MPBi + $20 = MSB
D = MPBi
S = MSC
25
10
U
30
12
V R
45 Z
19
Property Rights and Internalization of Externalities Externalities arise because some resource
users’ property rights are not considered in the marketplace by buyers or sellers of products.
Governments can give businesses the right to emit wastes in the air and water or it can give individuals the right to clean air and water.
20
Coase's Theorem By establishing rights to use
resources, government can internalize externalities when transactions or bargaining costs are zero.
21
Limitations of Coase’s Theorem Transactions costs are not
zero in many situations. However you allocate the
property rights, the distribution of income is affected.
22
Applying Coase's Theorem The Clean Air Act of 1990 allows for the sale
of the "right to pollute." Firms face a tradeoff when they pollute. If they pollute, they forgo the right to sell their emission permits to others.
In markets for electricity, Clean Air Act has motivated firms to shift to natural gas and away from coal as a means of producing electricity.
23
Figure 3.8 Pollution Rights and Emissions
S = Supply of Pollution Rights
D = MSB of Emitting Wastes
100,000Pri
ce
an
d M
arg
ina
l So
cia
l Be
ne
fit
Tons of Annual Emissions and Number of Pollution Rights
0
$20
75,000
24
Figure 3.9 The Efficient Amount of Pollution Abatement
MSB
MSC
E
A*
Ma
rgin
al S
oc
ial C
os
t a
nd
Be
ne
fit
Percent Reduction in Waste Emitted per Year 0 100
25
Regulatory Solutions Instead of using market
forces to force firms to internalize externalities, we can use emission standards and apply these to all market players.
26
Figure 3.10 Regulating Emissions: Losses in Efficiency From Differences in the Marginal Social Benefit of
Emissions
MSB
MSB QRB
QRA
A
B
G
H
QR
MEC = MSC
MEC = MSC
10
10
C
F
QA*
QB* 0
Firm A
Co
st a
nd
Ben
efit
(D
oll
ars)
Firm B
QB1
QA1
Tons of Emissions per Year
27
Figure 3.11 Losses in Efficiency From Emissions Standards When MEC Differs Among Regions
MEC = MSC
QRD
QRC
MEC = MSC 20
X
QC*
T
QD*
Firm C
Tons of Emissions per Year
Firm D
Co
st a
nd
Ben
efit
(D
oll
ars)
MSB
MSB
S
Y
Z
R
QRQR
28
Costs and Benefits to the EPA The EPA estimates that annual compliance costs
could be in the range of $225 billion per year. The EPA estimated in 1990 that the benefits of
the Clean Air Act were nearly 50 times the costs. Ninety percent of the benefits are estimated to
come from laws pertaining to power plants and factories.