chapter 3 l.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Chapter 3 PowerPoint Presentation
Download Presentation
Chapter 3

Loading in 2 Seconds...

play fullscreen
1 / 36

Chapter 3 - PowerPoint PPT Presentation


  • 224 Views
  • Uploaded on

Chapter 3. Externalities and Public Policy. 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 . Externalities and Efficiency.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Chapter 3' - tamasine


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
chapter 3

Chapter 3

Externalities and Public Policy

externalities
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 .
externalities and efficiency
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. These occur when market transactions for a good produce negative externalities.
social costs
Social Costs

MSC = MPC + MEC

figure 3 1 market equilibrium a negative externality and efficiency
Figure 3.1 Market Equilibrium, A Negative Externality and Efficiency

MPC + MEC = MSC

G

S = MPC

110

B

10

105

A

100

Price, Benefit, and Cost (Dollars)

D = MSB

4.5

5

Tons of Paper Per Year (Millions)

implications of figure 3 1
Implications of Figure 3.1
  • Market equilibrium occurs where

MPC = MSB

  • Efficiency Requires that

MSC = MPC + MEC = MSB

positive externalities
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. These occur when the market for a good creates positive externalities.
social benefit
Social Benefit

MSB = MPB + MEB

figure 3 2 market equilibrium a positive externality and efficiency
Figure 3.2 Market Equilibrium, A Positive Externality and Efficiency

Z

45

S = MSC

30

V

Price, Benefit, and Cost (Dollars)

25

U

H

10

MPB + MEB = MSB

MPB

0

Inoculations Per

Year (Millions)

10

12

figure 3 3 a positive externality for which meb declines with annual output
Figure 3.3 A Positive Externality for Which MEB Declines With Annual Output

MPBi + MEB = MSB

S = MSC

F

30

B

S' = MSC'

A

25

C

20

Price, Benefit, and Cost (Dollars)

MPBi

0

10

12

16

20

Inoculations per Year (Millions)

internalization of externalities
Internalization of Externalities
  • An externality can be internalized under policies that force market participants to account for the costs of benefits of their actions.
corrective taxes to negative externalities
Corrective Taxes to Negative Externalities
  • Setting a tax equal to the MEC will internalize a negative externality.
figure 3 4 a corrective tax
Figure 3.4 A Corrective Tax

S’ = MPC + T = MSC

S = MPC

G

110

B

Net Gains in

Well-Being

105

Tax Revenue = Total

External Costs

100

A

T

95

Price, Benefit, and Cost (Dollars)

D = MSB

4.5

5

Tons of Paper Per Year (Millions)

results of a corrective tax
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.
using a corrective tax
Using a Corrective Tax
  • The greenhouse effect and a “Carbon Tax”
    • The greenhouse effect is caused by burning carbon-based fuels. A carbon tax can be imposed to limit greenhouse gasses to their socially optimal levels.
    • It is called a carbon tax because the amount of the tax would depend on the amount of carbon in the fuel.
theory of the second best
Theory of the Second Best
  • When one condition for an optimum is violated, then maintaining the others will not guarantee a second-best solution.
a polluting monopolist
A Polluting Monopolist
  • Chapter 2 showed that monopoly creates a loss to society. This chapter shows that 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.
figure 3 5 a second best efficient solution
Figure 3.5 A Second Best Efficient Solution

MPC + MEC = MSC

F

MPC

A

P

M

B

Price

C

D = MSB

MR

Q

Q*

0

M

Output per Year

corrective subsidies
Corrective Subsidies
  • Setting a subsidy equal to MEB will internalize a positive externality.
figure 3 6 a corrective subsidy
Figure 3.6 A Corrective Subsidy

Z

45

S = MSC

R

30

V

Price, Benefit, and Cost (Dollars)

25

U

Subsidy Payments

X

10

= MSB

D' = MPBi +

$20

Y

D = MPBi

0

10

12

Inoculations per Year (Millions)

property rights and internalization of externalities
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.
coase s theorem
Coase's Theorem
  • By establishing rights to use resources, government can internalize externalities when transactions or bargaining costs are zero.
the significance of coase s theorem
The Significance of Coase’s Theorem
  • The efficient mix of output will result simply as a consequence of the establishment of exchangeable property rights.
  • It makes no difference which party is assigned the right to use a resource.
  • If the transactions costs of exchanging the rights are zero, the efficient mix of outputs among competing uses of the resource will emerge.
figure 3 7 coase s theorem
Figure 3.7 Coase’s Theorem

A

B

MPCB + MEC = MSC

MPCB

MCW

Price of Beef (Dollars)

Price of Wheat (Dollars)

MCW*

PB

PW

QB*

QW*

QB1

QW1

Beef Output per Year

Wheat Output per Year

limitations of coase s theorem
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.
applying coase s theorem
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.
figure 3 8 pollution rights and emissions
Figure 3.8 Pollution Rights and Emissions

S = Supply of Pollution Rights

Price and Marginal Social Benefit

D = MSB of

Emitting Wastes

$20

0

75,000

100,000

Tons of Annual Emissions

and Number of Pollution Rights

figure 3 9 the efficient amount of pollution abatement
Figure 3.9 The Efficient Amount of Pollution Abatement

MSC

Marginal Social Cost and Benefit

E

MSB

A*

0

100

Percent Reduction in Waste Emitted per Year

recycling
Recycling
  • Recycling may be a less efficient and more polluting use of labor, land and capital than simple land fill disposal because:
    • Collecting waste for recycling costs three times as much as collecting it for disposal.
    • Rural land is inexpensive.
    • Recycling paper creates more water pollution and does not “save” trees; it simply reduces the number that are planted.
regulatory solutions
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.
slide31
Figure 3.10 Regulating Emissions: Losses in Efficiency From Differences in the Marginal Social Benefit of Emissions

Firm A

B

MEC = MSC

C

10

A

DQRA

MSB

Cost and Benefit (Dollars)

QA*

QA1

Tons of Emissions per Year

Firm B

MEC = MSC

F

G

10

H

DQRB

MSB

0

QB*

QR

QB1

figure 3 11 losses in efficiency from emissions standards when mec differs among regions
Figure 3.11 Losses in Efficiency From Emissions Standards When MEC Differs Among Regions

Firm C

Firm D

MSB

MEC = MSC

X

Y

Cost and Benefit (Dollars)

20

S

Z

T

MEC = MSC

R

MSB

DQRC

QC*

QR

QR

DQRD

QD*

Tons of Emissions per Year

markets for pollution rights
Markets for Pollution Rights
  • The Clean Air Act of 1990 allowed firms the right to trade Sulfur Dioxide emissions allowances.
  • The market for the allowances began in 1991.
  • Firms must have the allowances to emit Sulfur Dioxide.
  • Firms increasing production can buy permits or use pollution controls to keep their total emissions constant.
  • Firms that reduce their emissions can sell their allowances to others.
global externalities
Global Externalities
  • CFC’s
  • Deforestation
  • Global Warming
costs and benefits to the epa
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.