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Externalities. -an undesirable property of Perfect Competition -”Market Failures” ????. An Externality is …. a “good” or a “bad” not priced in the market. when a good has no price or the wrong price. assumed away in the PC model. Negative Externality. E.g., pollution

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Presentation Transcript
externalities

Externalities

-an undesirable property of Perfect Competition

-”Market Failures” ????

LTC Gutermuth - Industrial Organization

an externality is
An Externality is ….
  • a “good” or a “bad” not priced in the market.
  • when a good has no price or the wrong price.
  • assumed away in the PC model.

LTC Gutermuth - Industrial Organization

negative externality
Negative Externality
  • E.g., pollution
  • Firm doesn’t bear the full costs of production.
  • Firm produces more than is socially optimal.

LTC Gutermuth - Industrial Organization

positive externality
Positive Externality
  • E.g., a garden view, a scientific discovery, a “public good”
  • Beneficial, but uncompensated action.
  • Too little produced than is socially optimal.

LTC Gutermuth - Industrial Organization

an example of pollution
An example of pollution
  • PC says “set P=MC”. BUT ………………
  • Private MC (to the firm) vs. Social MC !!!!!!
  • In the PC model, costs are underestimated, and
    •  Price is too low!!!!

LTC Gutermuth - Industrial Organization

what pc doesn t consider
What PC doesn’t consider

LTC Gutermuth - Industrial Organization

solutions
Solutions
  • Regulation to produce Q*
  • “Internalize the externality”
    • Impose a tax on the firm
  • Sell Pollution Permits

LTC Gutermuth - Industrial Organization

what would coase say
What would Coase say?
  • With perfect property rights
    •  Doesn’t matter!!!!!!
  • With ill-defined property rights
    •  assign rights so as to minimize DWL

LTC Gutermuth - Industrial Organization

slide9
So ………………..

what IS a “Market Failure”?????

LTC Gutermuth - Industrial Organization

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