Externalities Commons and Public Goods Perloff Chapter 18
Externalities, Commons and Public Goods Perloff Chapter 18
Externalities • When a person’s well being or a firm’s production capacity is affected directly by another’s actions. • Negative – Chemical plant dumping waste into a lake. • Positive – A firm installing shrubs and sculpture benefits neighbours
Marginal cost with and Externality • Marginal Private Cost – The additional cost incurred when an additional unit of output is produced. • Marginal Social Cost – The full cost incurred by all of society in producing another unit of output. – MCs=MCp+MCg
Welfare Effects of Pollution Price of paper, p, $ per ton ` 450 s p MC = MC + MC g Social Private Change CS A A+B+C+D PSp B+C+F+G F+G+H H-B-C Cg C+G C+D+E+G+H D+E+H PSp-Cg B+F F-C-D-E -B-C-D-E Cs+PSs A+B+F-E -E=DWL A MC p es ps = 282 B pc = 240 198 F 84 E C D H G ec MC p MC g 30 Demand 0 Qs = 84 Qc = 105 225 Q, Tons of paper day
Emissions Standard • Regulate pollution (or output) in order to achieve the social optimum. • In the paper example constrain output to 84 units per day. Need to know: – Demand curve – Marginal social cost curve – Relationship between paper production and pollution. • Enforcement is costly.
– vary tax with output (t(Q)) – fixed tax (t) 450 MC p = 198 ps = 282 MC s = MC p + t (Q) MC p + t es 0 MC p t = 84 MC g = 84 • Tax the pollution that is produced. • Tax output (assuming a fixed relationship with pollution) • Either: Price of paper, p, $ per ton Emissions Fee Demand Qs = 84 225 Q, Tons of paper day
Cost benefit Analysis • Compares the costs and benefits of a movement away from the market equilibrium. • Costs: – Reduced output of paper – Consumer surplus reduced – Producer surplus reduced • Benefits – Reduced costs of polution
Benefit, Cost, $ Cost: less paper 4, 000 Benefit: less gunk 2, 000 0 105 Maximum net benefit 84 63 (b) Marginal Cost and Marginal Benefit Marginal benefit, Marginal cost, $ CBA of polution (a) Cost and Benefit Q, Tons of paper day G, Units of gunk per day MC 105 84 MB 0 105 84 Q, Tons of paper day G, Units of gunk per day
Price of paper, p, $ per ton Externality With Monopoly 450 MC s = MC p + MC g et 330 310 282 A B em es C MC p D ec 240 MC g 30 MR 0 60 70 84 105 Demand 225
Regulation of a Monopoly with an Externality • It may be that the monopoly is preferable to competition if regulation is not possible. • Charging a tax equal to the MC of pollution may reduce welfare if monopoly output is below social optimum. • Achieving the social optimum may entail subsidisation of a monopoly.
Property rights • An exclusive right to use an asset • Private ownership of asset • Right to be free of noise pollution – Courts could be used to enforce the right – You could sell the right to someone who wants to be noisy. • In many cases the rights are not assigned.
Coase Theorem: No property Rights Boat firm: Boats rented per day 0 Chemical firm: tonnes dumped per day. 0 1 2 1 $0 $0 2 $14 $0 $0 $0 $10 $10 $0 $15 $5 $10 $2 $15 -$3 $15 If property rights are with boat owner: If property rights are with chem. firm: Minimum price per unit of pollution is $5 Maximum price is $10 Maximum price is $7. 50
Coase theorem: Property rights with boat firm Pollution priced at $7 per tonne Boat firm: Boats rented per day 0 Chemical firm: tonnes dumped per day. 0 1 2 1 $0 $0 $14 $0 $7 $3 $15 $0 $17 $3 $14 $1 2 $12 $3 $16 $1 $1
Coase theorem: property rights with chemical firm Pollution priced at $6 per tonne Boat firm: Boats rented per day 0 Chemical firm: tonnes dumped per day. 0 1 2 1 -$12 $2 $12 -$6 $16 $3 $12 $4 $16 $0 $15 2 -$1 $16 $2 $15 -$3 $15
Coase Therorem: Summary • Assigning property rights results in the efficient outcome. • Efficiency is achieved regardless of who has the property rights. • The distribution of welfare in the efficient outcome is dependent on the initial allocation of property rights.
Common Property • Unlike private property people cannot be excluded. • When deciding how much to use, people ignore the impacts on others so the resource is overused. • Common pool, water, gas, oil. • Internet • Roads • Fisheries
Public Goods • Non-Excludability – People cannot be prevented from consuming a good. • Non rivalry – The good is not used up when one person uses it.
Markets for public goods Price of guard service, $ per hour • Only exist for excludable goods. • Demand curve is the vertical summation of individual willingness-topay or demand curves 25 D 18 D 1 13 ep 10 es Supply, MC 8 7 D 2 3 2 0 4 5 7 9 Guards per hour
Free riding
Voting for the provision of a public good
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