“The Economic Way of Thinking” 12th Edition Chapter 10: Externalities and Conflicting Rights

Chapter Outline Externalities, Negative and Positive Perfection is Unattainable Negotiation Reducing Externalities Through Adjudication The Problem of Radical Change Reducing Externalities Through Legislation Minimizing Costs

Chapter Outline Another Approach: Taxing Emissions Licenses to Pollute Efficiency and Fairness Rights and the Social Problem of Pollution Traffic Congestion as an Externality

Introduction Decision Making Individuals choose their courses of action by weighing the expected marginal benefits of any decision against its expected marginal costs. Benefits and costs for other people will not affect the decision unless the benefits and costs for others matter to the actor. This is extremely important for the understanding of a wide range of social problems.

Externalities, Negative and Positive Negative externalities（负外部性） Or spillover costs（溢出成本） Or External Costs (外部成本) Costs not considered in decision making. Examples Congestion（交通拥堵） caused by slow drivers creates extra travel time. pollution

Externalities, Negative and Positive Positive externalities（正外部性） Benefits from an action that the decision maker does not take into account. Examples Beautiful dress Delicious cake

Perfection Is Unattainable This chapter focuses on negative externalities. Negative externalities cannot be completely eliminated because of transaction costs. Transaction costs Are the costs of arranging contracts or transaction agreements between suppliers and demanders.

Perfection is Unattainable Scenario Motorcycle rider leaves home early in the morning. Imposes costs on neighbors still asleep. Question Why don’t they pay him to push his cycle out of the neighborhood prior to starting it? Answer Transaction costs may be very high!

Perfection is Unattainable Internalizing Externalities（将外部性内在化） When individuals take into account the externality when making a decision. Are monetary payments necessary to eliminate an externality? No!

Perfection is Unattainable In industrialized Societies Negative externalities multiply. Civil people learn to ignore most of the negative externalities others inflict on them and try to be sensitive to the unintended costs that their own actions impose on others.

Perfection is Unattainable The first step to tackle the problems created by negative externalities it to cultivate the civic virtues of Empathy（体谅） Courtesy（礼貌） Humility（谦逊） Tolerance（容忍） Almost all other procedures for dealing with externality problems presuppose these virtues to some extent.

Negotiation（谈判，协商） Negotiation is used to minimize social problems created by negative externalities. Negotiation produces mutual gains from exchange. Failure to negotiate creates high costs to others.

Negotiation Clearly defined property rights（明确定义的产权） provide the basis for negotiation. Coase Theorem（科斯定理）：如果不存在交易费用，则产权的初始分配不影响资源的最终配置。

Reducing Externalities Through Adjudication（裁定） A process for discovering who has which rights. Clarifies property rights. Discovery or adjudication aims at maintaining the continuity of expectation.

Reducing Externalities Through Adjudication Question Which would happen if no one knew what to expect? Answer No one knows what to do or what others will do.

Reducing Externalities Through Adjudication Tries to avoid unexpected outcomes. Tries to support expectations that are most widely and confidently held. Tries to maintain a continuity of expectations.

The Problem of Radical Change Technology sometimes forces rapid changes. New rules must be formed if negative externalities rapidly multiply. Rising incomes may also demand new definitions of property rights. Example: We now place a high value on clean air. Clean air as a right. Requires new rules.

Reducing Externalities Through Legislation（立法） The creation of new rules is legislation. Legislation creats property rights Changing the rules of the game always raises the question of fairness and compels major changes in behavior.

Reducing Externalities Through Legislation The challenge for a society is to legislate in ways that avoid gross injustices Minimize the costs of achieving the objectives Economic theory has more to say on the latter

Minimizing Cost Minimizing cost isn’t the only consideration when government officials are trying to achieve some objective. Fairness is also a criterion for the evaluation of government decisions.

Another Approach: Taxing Emissions（对排污征税） It is difficult at times for government agencies to determine unit cost. Polluters have an incentive to exaggerate their costs. To resolve this kind of information scarcity in the least costly manner, the EPA could impose a tax per unit of emissions.

Another Approach: Taxing Emissions Pollution is a spillover cost, a cost not borne by its producer. If the per unit cost of a pollutant is set equal to the spillover cost per unit, then the creator of the costs is made to bear them. With the tax, less pollution will occur. Question At what point would pollution cease?

Another Approach: Taxing Emissions The task of the EPA is to compare the marginal cost of reducing the emissions with the marginal benefits. 征税这种方式使得环保署可以通过在各种估计的污染成本下观察污染者所做出的反应来获取有关减轻污染的成本和收益的信息。 Learning by experimentation

License（许可） to Pollute Pollution tax acquires the label（标签） of “Licenses to pollute”（污染许可证）, which sounds like an official permission to commit crimes. In fact, most pollution is: A cost Not a crime Should be “licensed” if the cost is less than the properly calculated benefits associated with it.

Efficiency and Fairness（效率与公平） Some people object to pollution taxes as unfair place the whole burden of the tax on the poor, allowing the rich to foul the environment. Choosing the parties, according to the least-cost solution, who must reduce their pollution based on the cost to them of doing so also seems arbitrary and unjust to many people.

Efficiency and Fairness It must be shown that the efficient solution can be achieved while settling the fairness issue in different ways. We don’t necessarily commit ourselves to place the costs on any particular parties when selecting the most efficient solution.

Efficiency and Fairness Pollution reduction is a lot like any other useful activity in that some are more efficient at it than others. We gain by having additional clean air produced by those with a comparative advantage at the job.

Efficiency and Fairness Comparative advantages are exploited through exchange. So, the tax approach is in general superior to an approach that assigns physical restrictions to particular firms.

Rights and Social Problem of Pollution Pollution is a major social and political concern because people disagree about relevant rights disagreement of these sorts can be extremely difficult to resolve. The economic way of thinking suggests a few principles that might be of considerable help:

Rights and Social Problem of Pollution Demand for any good is never completely inelastic,including clean air. Control should be avoided People should have much freedom to choosing their own ways of adapting. The importance of stable property rights Transaction costs go down and effective cooperation increases.

Traffic Congestion as an Externality（作为一种外部性的交通拥堵） Negative externality A cost generated by people who don’t take it into account when making their decisions They take into account only the costs others drivers create

Traffic Congestion as an Externality If motorists had to pay marginal congestion cost（边际拥堵成本） They drive only when benefits exceeded costs How can externalities be internalized? congestion pricing (对拥堵定价) People often call it tolls（通行费，过路费）, are very hostile to that idea.

Traffic Congestion as an Externality Tolls vs. Gasoline Taxes（燃油税） Gasoline Taxes For road construction Not for use Tolls For use of road It is the ignored cost of using roads that generates the congestion about which everyone complains. If fees paid based on the costs our driving imposes on others, congestion diminishs.

Once Over Lightly Spillover Costs = Externalities Transaction Costs prevent negotiations. Negotiation used to secure cooperation. Clearly defined property rights ease negotiations. Some pollution reduction activity is more efficient than others.