Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 4 Property Rights, Externalities, and Environmental Problems 환경문제와 소유권 그리고 외부효과 2009/10/ Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Introduction This chapter focuses on the inefficiencies caused by the lack of well-defined property rights. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Objectives Define property right. Discuss an efficient property right structure. Illustrate how well-defined, exchangeable property rights will lead to economic efficiency. Review consumer surplus, producer surplus and the maximization of net benefits. Define externality or third party effect and illustrate market failure in the presence of an externality. Use examples to illustrate both positive and negative externalities. Define scarcity rent. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Illustrate how open access regimes lead to overexploitation. Distinguish between various property rights regimes including private property, common property resource regimes and open access resources. Illustrate how open access regimes lead to overexploitation. Define public goods. Define free-rider. Illustrate other market imperfections such as the effects of monopoly power. Discuss the effects of discount rates on allocation decisions. Examine the reasons for the divergence of social and private discount rates. Define rent seeking and government failure. Discuss remedies for negative externalities. Define the Coase Theorem. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Property Rights and Efficient Market Allocations Efficient Property Right Structures Exclusivity—All the benefits and costs should only accrue to the owner. Transferability—Property rights should be transferred to others. Enforceability—Property rights should be secure from seizure or encroachment. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

FIGURE 4.1 The Consumer’s Choice Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

FIGURE 4.2 The Producer’s Choice Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

FIGURE 4.3 Market Equilibrium Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Consumer surplus is willingness to pay minus the actual payment or the area under the demand curve and above the price line. Consumers will decide how much to purchase by maximizing his or her own individual benefit. Producer surplus is the area above the marginal cost (supply) curve and below the price line. This is the net benefit received by the seller. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Producer Surplus, Scarcity Rent, and Long-Run Competitive Equilibrium In the short run, producer surplus = profits + fixed cost. In the long run, producer surplus = profits + rent. Under perfect competitions, long-run profits equal zero and producer surplus equals rent. Scarcity Rent Scarcity rent is the producer surplus persists in the long-run competitive equilibrium.  Article, “Scarcity Rents and Rent Seeking” Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Externalities as a Source of Market Failure The Concept Introduced Externalities exist whenever the welfare of some agent depends not only on his or her activities, but also on activities under the control of some other agent. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

FIGURE 4.4 The Market for Steel Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Types of Externalities External diseconomy or negative externality It imposes costs on a third party. External economy or positive externality It occurs whenever an activity imposes benefits on a third party. Pecuniary externalities It exists when the external effect comes from altered prices. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Improperly Designed Property Rights Systems Other Property Rights regimes Private property regimes Individuals hold entitlements. State-property regimes Governments own and control property. Common-property regimes Property is jointly owned and managed by a specific group. Res nullius or open access regimes No one owns or exercises control over the resources. Common pool resources— characterized by non-exclusivity and divisibility. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

FIGURE 4.5 Bison Harvesting Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Public Goods Public goods Biological diversity They are both indivisible and nonexcludable. 자원 별 소유레짐 비교 Biological diversity It includes the amount of genetic variation among individuals within in a single species and the number of species in a community. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

FIGURE 4.6 Efficient Provision of Public Goods (1 of 3) Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

FIGURE 4.6 Efficient Provision of Public Goods (2 of 3) Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

FIGURE 4.6 Efficient Provision of Public Goods (3 of 3) Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

FIGURE 4.6 Efficient Provision of Public Goods ? Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

A free rider is someone who derives benefits from a commodity without contributing to its supply. An efficient allocation is determined by the intersection of the demand curve and the marginal cost curve. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Example 4.3 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Example 4.3 (continued) Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Imperfect market Structures Monopoly: when product is sold by a single seller Monopolies will supply too little of a good at too high a price. At the monopoly output, marginal benefits are greater than marginal costs. Net benefits are not maximized and there is a deadweight loss. A cartel is a group of producers who form a collusive agreement to gain monopoly power. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

FIGURE 4.7 Monopoly and Inefficiency Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Debate 4.1 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Debate 4.1 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Divergence of Social and Private Discount Rates Risk-free cost of capital The rate of return is earned when there is absolutely no risk of earning more or less than the expected return. Risk premium It is the amount required to compensate capital owners for potential differences between expected and actual returns. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Government Failure Rent seeking Rent seeking behavior may persuade government officials to pursue options that are beneficial to a specific interest group and would not maximize social net benefits. Examples include agricultural producers seeking price supports and consumer groups seeking subsidies. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

FIGURE 4.8 Efficient Output with Pollution Damage Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

The Pursuit of Efficiency Private Resolution Through Negotiation The simplest means of restoring efficiency The Courts: Property Rules and Liability Rules Not well-defined property rights corrected by courts Legislative and Executive Regulation Several forms taken including taxes and regulatory laws An Efficient Role for Government Considering the role of the government in restoring efficiency Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Coase Theorem When negotiation costs are negligible and affected parties can freely negotiate, the entitlement can be allocated by the courts to either party and an efficient allocation will result. Only the distribution of costs and benefits among the effective parties is changed. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Figure 4.9 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Summary Property rights Externalities Improperly defined property rights system Imperfect markets Divergence of social and private discount rate Rent seeking Next class = Ch. 6 인구문제 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.