SMC PMC MD Price of steel SPMC The

SMC = PMC + MD Price of steel S=PMC The yellow steeltriangle firm sets is the consumer PMB=PMC andto producer find its firmoptimal The steel socially overproduces level of privately surplus optimal at from Qproduction. society’s 1 profit is at viewpoint. Q 2, the maximizing output, This Theframework marginal damage does not. Q 1. of SMC and SMB. intersection The red triangle is the curve capture (MD) therepresents harm donethe to The social marginal cost deadweight is loss from the fishery’s the fishery, harm however. per unit. the sum of PMC and MD, and private production level. represents the cost to society. MD p 2 p 1 D = PMB = SMB 0 Figure 2 Q 1 Negative Production Externalities QSTEEL

Price of cigarettes S=PMC=SMC The yellow smoker triangle sets is the surplus PMB=PMC to thetosmokers find his privately (and producers) optimal quantity at Q 1. of cigarettes, The This. The MD framework curve represents does Q not 1. benefit is social marginal the capture nonsmoker’s harm done per to PMB the difference between The red triangle is the non-smokers, pack of cigarettes. however. and MD. deadweight loss from the private production The socially smoker optimal consumes leveltoo of level. MD manysmoking cigarettes is at from Q 2, society’s the intersection viewpoint. of SMC and SMB. p 1 p 2 SMB=PMB-MD 0 Figure 3 Q 2 Q 1 Negative Consumption Externalities D=PMB QCIGARETTES

SMC = PMC + This bargaining process. MD will continue until theissocially The gain to society is this area, the The gain to society this area, efficient level. (PMB -PMC) between the difference PMC) and MD MD for the second first unit. Price of steel p 2 S = PMC The If the reason fisheryishad because property any rights, steel itproduction would initially makes impose the p 1 zero fishery steelworse production. off. MD Thus, While But While there itthe is possible is fishery the still room fishery room suffers to forbargain. suffers to the bargain. only steel the Thus, it. There is possible for the steel a The modest firm same steel to steel “bribe” amount damage firm gets the of gets fishery as damage. a lot from ainbit ofinthe less firm to. The “bribe” the fishery order surplus to produce from first the the unit. first second next unit. order to produce the first unit. 0 Figure 5 1 2 Q 1 D = PMB SMB QSTEEL Negative Production Externalities and Bargaining: Giving the Fish People Property Rights

SMC = PMC + MD Price of steel S = PMC This bargaining process will The gain to to society is this area, the The gain continue until the society socially is this area, the If the This steel levelfirm of production had property difference between MDMD andand (PMB difference between (PMBefficient level. While the steel firm suffers a rights, maximizes it would the consumer choose and unit. PMC) byinitially cutting another PMC) by cutting back 1 unit. only larger a modest loss in loss profits. in profits. producer Q surplus. . p 2 1 p 1 MD The Thus, fishery it is fishery itpossible gets is possible gets the for same a lot the forofthe fishery surplus toas“bribe” to cutting from “bribe” the cutting back the steel from steel back firm D=PMB=SMB to steel cutthe production back first toanother cut unit. back. by unit. one unit. 0 Figure 6 Q 2 Q 1 QSTEEL Negative Production Externalities and Bargaining: Steel Producers Have Property Rights

SMC=PMC+MD S=PMC+tax S=PMC Price of steel The socially optimal level of production, Q 2, then maximizes profits. The steel firm initially produces at QImposing of PMC Imposing aatax taxequal shifts to thethe PMC MD 1, the intersection and PMB. curve shifts curve the upward PMC and reduces such that steel it equals production. SMC. p 2 p 1 D = PMB = SMB 0 Figure 7 Q 2 Q 1 Corrective (“Pigouvian”) Taxation QSTEEL

SMC = PMC + MD S = PMC Price of steel p 2 The Yet firm the government has an incentive couldto simply require produce it to. Qproduce no 1. more than Q 2. p 1 D = PMB = SMB 0 Figure 9 Q 2 Q 1 Quantity Regulation QSTEEL

The. Table U. S. is 2 currently responsible for nearly 25% of the planet’s carbon dioxide emissions. Developing counties like China and India emit large quantities of Japan contributes only 5% of greenhouse gasses. annual emissions.