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Chapter Seventeen. Externalities, Open Access, and Public Goods. © 2008 Pearson Addison Wesley. All rights reserved. In this chapter, we examine seven main topics Externalities The Inefficiency of Competition with Externalities Regulating Externalities Market Structure and Externalities

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Chapter Seventeen

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Chapter seventeen

Chapter Seventeen

Externalities, Open Access, and Public Goods

© 2008 Pearson Addison Wesley. All rights reserved


Externalities open access and public goods

In this chapter, we examine seven main topics

Externalities

The Inefficiency of Competition with Externalities

Regulating Externalities

Market Structure and Externalities

Allocating Property Rights to Reduce Externalities

Open-Access Common Property

Public Goods

Externalities, Open Access, and Public Goods

© 2008 Pearson Addison Wesley. All rights reserved.


Externalities

Externality

The direct effect of the actions of a person or firm on another person’s well-being or a firm’s production capability rather than an indirect effect through changes in prices.

Externalities

© 2008 Pearson Addison Wesley. All rights reserved.


Externalities1

Externalities may either help or harm others.

An externality that harms someone is called a negative externality.

A positive externalitybenefits others.

Externalities

© 2008 Pearson Addison Wesley. All rights reserved.


Chapter seventeen

南投有雞舍養了10萬隻雞,業者收集雞糞卻不注意衛生問題,任由蒼蠅滋生,雞糞的臭味沖天,只要風一吹,附近村落全都聞到臭味;更讓附近居民氣憤的是,雞舍主人在空地隨便挖個大洞,就把垃圾、雞屎、污水倒進去,由於雞舍位處水源上游,因此在下游的民眾擔心,他們喝到的都是雞屎臭水。

雞糞滋生蒼蠅 臭味沖天惹民怨

資料來源:http://tw.news.yahoo.com/article/url/d/a/090516/8/1jm4w.html

更新日期:2009/05/16 17:35 黃茂松 (TVBS)


Chapter seventeen

…第一市場管委會表示,近年來流動攤販愈來愈多,但很少聽到店家抱怨搶生意,反而是民眾經常投訴道路堵塞…公家機關關切攤販是否因盤據道路騎樓,影響交通安全或民眾的通行權益。…潭子鄉長簡文祥指出,要解決流動攤販衍生的問題,沒有兩全其美的辦法,鄉公所雖可轉請警察取締,但取締不是要逼流動攤販無法生存,而是退到不妨害交通的適當地點營業…

景氣差攤販增加 影響通行權益

資料來源:http://tw.news.yahoo.com/article/url/d/a/090511/78/1j9q4.html

更新日期:2009/05/11 04:09 截錄自:自由時報


The inefficiency of competition with externalities

Competitive firms and consumers do not have to pay for the harms of their negative externalities, so they create excessive amounts.

Because producers are not compensated for the benefits of a positive externality, too little of such externalities is produced.

The Inefficiency of Competition with Externalities

© 2008 Pearson Addison Wesley. All rights reserved.


The inefficiency of competition with externalities1

Private cost

The cost of production only, not including externalities

Social cost

The private cost plus the cost of the harms from externalities

The Inefficiency of Competition with Externalities

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Supply and demand analysis

We use a supply-and-demand diagram to illustrate that a competitive market produces excessive pollution because the firms’ private cost is less than their social cost.

Supply-and-Demand Analysis

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Figure 17 1 welfare effects of pollution in a competitive market

The competitive equilibrium, , is determined by the intersection of the demand curve and the competitive supply or private marginal cost curve, , which ignores the cost of pollution.

Figure 17.1 Welfare Effects of Pollution in a Competitive Market

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Figure 17 1 welfare effects of pollution in a competitive market1

The social optimum, , is at the intersection of the demand curve and the social marginal cost curve, , where is the marginal cost of the pollution (gunk). Private producer surplus is based on curve, and social producer surplus is based on the curve.

Figure 17.1 Welfare Effects of Pollution in a Competitive Market

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Figure 17 1 welfare effects of pollution in a competitive market2

Figure 17.1Welfare Effects of Pollution in a Competitive Market

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Supply and demand analysis1

The figure illustrates two main results with respect to negative externalities.

First, a competitive market produces excessive negative externalities.

Second, the optimal amount of pollution is greater than zero.

Supply-and-Demand Analysis

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Cost benefit analysis

By using a cost-benefit analysis, we obtain another interpretation of the pollution problem in terms of the marginal cost and benefit of the pollution itself.

Welfare is maximized by reducing output and pollution until the marginal benefit from less pollution equals the marginal cost of less output.

Cost-Benefit Analysis

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Figure 17 2 cost benefit analysis of pollution

The benefit curve reflects the reduction in harm from pollution as the amount of gunk falls from the competitive level. The cost of reducing the amount of gunk is the fall in output, which reduces consumer surplus and private producer surplus. Welfare is maximized at 84 tons of paper and 84 units of gunk, the quantities at which the difference between the benefit and cost curves, the net benefit, is greatest.

Figure 17.2 Cost-Benefit Analysis of Pollution

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Figure 17 2 a cost benefit analysis of pollution

Figure 17.2(a)Cost-Benefit Analysis of Pollution

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Figure 17 2 cost benefit analysis of pollution1

The net benefit is maximized where the marginal benefit, , which is the slope of the benefit curve, equals the marginal cost, , the slope of the cost curve.

Figure 17.2 Cost-Benefit Analysis of Pollution

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Figure 17 2 b cost benefit analysis of pollution

Figure 17.2(b)Cost-Benefit Analysis of Pollution

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Regulating externalities

Because competitive markets produce too many negative externalities, government intervention may provide a social gain.

Regulating Externalities

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Table 17 1 industrial co 2 emissions 2003

Table 17.1Industrial CO2 Emissions, 2003

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Regulating externalities1

If a government has sufficient knowledge about pollution damage, the demand curve, costs, and the production technology, it can force a competitive market to produce the social optimum.

Regulating Externalities

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Regulating externalities2

A governmental limit on the amount of air or water pollution that may be released is called an emission standard. A tax on air pollution is called an emissions fee, and a tax on discharges into the air or waterways is an effluent charge.

Regulating Externalities

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Regulating externalities3

Internalize the externality

To bear the cost of the harm that one inflicts on others (or to capture the benefit that one provides to others)

Regulating Externalities

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Figure 17 3 taxes to control pollution

Placing a tax on the firms equal to the harm the gunk, , causes them to internalize the externality, so their private marginal cost is the same as the social marginal cost, . As a result, the competitive after-tax equilibrium is the same as the social optimum, .

Figure 17.3 Taxes to Control Pollution

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Figure 17 3 taxes to control pollution1

Figure 17.3Taxes to Control Pollution

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Figure 17 3 taxes to control pollution2

Alternatively, applying a specific tax of

per ton of paper, which is the marginal harm from the gunk at , also results in the social optimum.

Figure 17.3 Taxes to Control Pollution

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Emissions fees versus standards under uncertanity

Emissions Fees versus Standards under Uncertanity

  • We have seen that the government can induce a firm to produce efficiently if it sets either a fee or a standard optimally.

  • Although either regulation would be optimal in a world of certainty, these regulations are not optimal if the actual marginal cost curve is higher or lower than the expected curve.

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Figure 17 4 fees versus standards under uncertainty

Figure 17.4Fees Versus Standards Under Uncertainty

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Market structure and externalities

Two of our main results concerning competitive markets and negative externalities—that too much pollution is produced and that a tax equal to the marginal social cost of the externality solves the problem—do not hold for other market structures.

Market Structure and Externalities

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Monopoly and externalities

Although the competitive market with an externality always produces more output than the social optimum, a monopoly may produce more than, the same as, or less than the social optimum.

Monopoly and Externalities

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Monopoly and externalities1

Which effect dominates depends on the elasticity of demand for the output and on the extent of the marginal damage the pollution causes.

Monopoly and Externalities

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Monopoly versus competitive welfare with externalities

In the absence of externalities, welfare is greater under competition than under an unregulated monopoly.

However, with an externality, welfare may be greater with monopoly than with competition.

Monopoly Versus Competitive Welfare with Externalities

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Figure 17 5 monopoly competition and social optimum with pollution

At the competitive equilibrium, , more is produced than at the social optimum, . As a result, the deadweight loss in the competitive market is . The monopoly equilibrium, , is determined by the intersection of the marginal revenue and the private marginal cost, , curves.

Figure 17.5 Monopoly, Competition, and Social Optimum with Pollution

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Figure 17 5 monopoly competition and social optimum with pollution1

The social welfare (based on the marginal social cost, , curve) under monopoly is . Here the deadweight loss of monopoly, , is less than the deadweight loss under competition, .

Figure 17.5 Monopoly, Competition, and Social Optimum with Pollution

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Figure 17 5 monopoly competition and social optimum with pollution2

Figure 17.5Monopoly, Competition, and Social Optimum with Pollution

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Taxing externalities in noncompetitive markets

Trying to solve a negative externality problem is more complex in a noncompetitive market than in a competitive market.

Taxing Externalities in Noncompetitive Markets

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Taxing externalities in noncompetitive markets1

To achieve a social optimum in a competitive market, the government only has to reduce the externality, possibly by decreasing output.

In a noncompetitive market, the government must eliminate problems arising from both externalities and the exercise of market power.

Taxing Externalities in Noncompetitive Markets

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Allocating property rights to reduce externalities

Instead of controlling externalities directly through emissions fees and emissions standards, the government may take an indirect approach by assigning a property right: an exclusive privilege to use an asset.

If no one holds a property right for a good or a bad, the good or bad is unlikely to have a price.

Allocating Property Rights to Reduce Externalities

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Allocating property rights to reduce externalities1

For many bads, such as pollution, and for some goods, property rights are not clearly defined. No one has exclusive property rights to the air we breathe. Because of this lack of a price, a polluter’s private marginal cost of production is less than the full social marginal cost.

Allocating Property Rights to Reduce Externalities

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Coase theorem

According to the Coase Theorem (Coase, 1960), the optimal levels of pollution and output can result from bargaining between polluters and their victims if property rights are clearly defined.

Coase Theorem

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Table 17 2 a property rights and bargaining

Table 17.2(a)Property Rights and Bargaining

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Table 17 2 b property rights and bargaining

Table 17.2(b)Property Rights and Bargaining

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Table 17 2 c property rights and bargaining

Table 17.2(c)Property Rights and Bargaining

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Coase theorem1

If there are no impediments to bargaining, assigning property rights results in the efficient outcome at which joint profits are maximized.

Efficiency is achieved regardless of who receives the property rights.

Coase Theorem

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Coase theorem2

Who gets the property rights affects the income distribution. The property rights are valuable. The party with the property rights may be compensated by the other party.

Coase Theorem

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Problems with the coase approach

First, if transaction costs are very high, it might not pay for the two sides to meet.

Second, if firms engage in strategic bargaining behavior, an agreement may not be reached.

Third, if either side lacks information about the costs or benefits or reducing pollution, a nonefficient outcome may occur.

Problems with the Coase Approach

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Markets for pollution

If high transaction costs preclude bargaining, we may be able to overcome this problem by using a market, which facilitates exchanges between individuals.

Under this cap and trade system, the government gives firms permits, each of which confers the right to create a certain amount of pollution. Each firm may use its permits or sell them to other firms.

Markets for Pollution

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Markets for pollution1

By using a market, the government does not have to collect this type of detailed information to achieve efficiency. Its only decision concerns what total amount of pollution to allow.

Markets for Pollution

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Open access common property

Open-Access Common Property

Resources to which everyone has free access

Open-Access Common Property

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Overuse of open access common property

Because people do not have to pay to use open-access common property resources, they are overused.

e.g.

Overuse of Open-Access Common Property

  • Common Pools.

  • The Internet.

  • Roads

  • Fisheries.

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Solving the commons problem

Government Regulation of Commons

Overuse of a common resource occurs because individuals do not bear the full social cost. However, by applying a tax or fee equal to the externality harm that each individual imposes on others, a government forces each person to internalize the externality.

Solving the Commons Problem

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Solving the commons problem1

Government Regulation of Commons

Alternatively, the government can restrict access to the commons. One typical approach is to grant access on a first-come, first-served basis.

Solving the Commons Problem

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Solving the commons problem2

Assigning Property Rights

An alternative approach to resolving the commons problem is to assign private property rights.

Solving the Commons Problem

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Public goods

Public Good

A commodity or service whose consumption by one person does not preclude others from also consuming it

Public Goods

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Table 17 3 rivalry and exclusion

Table 17.3Rivalry and Exclusion

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Markets for public goods

Markets for public goods exist only if nonpurchasers can be excluded from consuming them.

Markets do not exist for nonexclusive public goods.

If the government does not provide a nonexclusive public good, no one provides it.

Markets for Public Goods

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Demand for public goods

Because a public good lacks rivalry, many people can get pleasure from the same unit of output. As a consequence, the social demand curve or willingness-to-pay curve for a public good is the vertical sum of the demand curves of each individual.

Demand for Public Goods

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Figure 17 6 inadequate provision of a public good

Security guards protect both tenants of the mall. If each guard costs $10 per hour, the television store, with demand , is willing to hire four guards per hour. The ice-cream parlor, with demand , is not willing to hire any guards.

Figure 17.6 Inadequate Provision of a Public Good

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Figure 17 6 inadequate provision of a public good1

Thus if everyone acts independently, the equilibrium is . The social demand for this public good is the vertical sum of the individual demand curves, . Thus the social optimum is , at which five guards are hired.

Figure 17.6 Inadequate Provision of a Public Good

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Figure 17 6 inadequate provision of a public good2

Figure 17.6Inadequate Provision of a Public Good

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Equation 17 1

Equation 17.1

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Equation 17 2

Equation 17.2

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Equation 17 3

Equation 17.3

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Equation 17 4

Equation 17.4

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Equation 17 5

Equation 17.5

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Free riding

Many people are unwilling to pay for their share of a public good. They try to get others to pay for it, so they can free ride: benefit from the actions of others without paying.

Free Riding

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Table 17 4 private payments for a public good

Table 17.4Private Payments for a Public Good

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Free riding1

In each of these games, the Nash equilibrium is for neither store to hire a guard because of free riding. The nonoptimal outcome occurs for the same reason as in other prisoners’ dilemma games: The stores don’t do what is best for them collectively when they act independently.

Free Riding

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Reducing free riding

Governmental or other collective actions can reduce free riding.

Methods that may be used include social pressure, merges, compulsion, and privatization.

Reducing Free Riding

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Valuing public goods

To ensure that a nonexclusive public good is provided, a government usually produces it or compels others to do so. Issues that a government faces in providing such a public good include whether to provide it at all and, if so, how much to provide.

Valuing Public Goods

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Table 17 5 voting on 300 traffic signals

Table 17.5Voting on $300 Traffic Signals

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Valuing public goods1

The problem with yes-no votes is that they ignore the intensity of preferences.

Thus such majority voting fails to value the public good fully and hence does not guarantee that it is efficiently provided.

Valuing Public Goods

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