Chapter 11: Externalities & Property Rights Part I.

Slides:



Advertisements
Similar presentations
15 CHAPTER Externalities.
Advertisements

1 CHAPTER.
15 EXTERNALITIES CHAPTER.
Externalities.
All Rights ReservedMicroeconomics © Oxford University Press Malaysia, – 1.
PART 10 Market Failures Markets may fail to generate efficient results due to Monopoly Externalities Public Goods Open Access Markets may also have informational.
Chapter 5 EXTERNALITIES
In this chapter, look for the answers to these questions:
1 Chapter 14 Practice Quiz Environmental Economics.
In chapter 10, we look for the answers to these questions:
Chapter 14.
Principles of Micro Chapter 11: Public Goods and Common Resources by Tanya Molodtsova, Fall 2005.
10 Externalities.
Externalities and Property Rights
16 CHAPTER Public Goods and Common Resources.
 Capitalism is associated with limited government, but government is necessary for three reasons:  Establish and maintain legal system to protect property.
Chapter 10: Market Failures
Public Goods and Common Property Resources Chapter 11.
10 Externalities CHAPTER Notes and teaching tips: 4, 8, 10, and 33.
Principles of Microeconomics, Prof. Maclachlan, Spring Externalities, Public Goods and Common Resources Chapters 10, 11.
Externalities and Public Goods
External Costs and Benefits
Efficiency and Non-Market Forces Going ga-ga about markets –Review of Market EfficiencyMarket Efficiency Government’s Role in Economic EfficiencyGovernment’s.
15 Externalities Notes and teaching tips: 4, 24, 28, and 40.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. Fernando & Yvonn Quijano Prepared by: Chapter 5 Externalities,
Chapter Thirty-Two Externalities.
Government and the Market. The Role of Government  Capitalism is associated with limited government, but government is necessary for three reasons: 
UNIT IV: GAMES & INFORMATION
Chapter 20 Externalities and Public Goods Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior.
Regulation of Externalities. Market Efficiency & Market Failure Efficiency –All goods worth more than they cost to produce get produced (No DWL) –No goods.
Chapter 3 Modeling Market Failure
When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Explain why negative externalities lead to inefficient.
Externalities and Public Goods
Economics of the Public Sector. The Role of Government  Capitalism is associated with limited government, but government is necessary for three reasons:
EXTERNALITIES 15 CHAPTER. Objectives After studying this chapter, you will able to  Understand the nature and source of externalities in a modern economy.
How can we limit climate change?
Chapter 5: Market Failure: A Role for Government
Chapter 15 Government’s Role in Economic Efficiency ECONOMICS: Principles and Applications, 4e HALL & LIEBERMAN, © 2008 Thomson South-Western.
Externalities ECO 230 J.F. O’Connor. Topics Nature of externalities Why do externalities cause market failure Private solutions to an externality problem.
1 Externalities. 2 Externalities  Externalities are a market failure (so Government intervention may be advisable).  Externalities imply that there.
A lesson from chapter 7: Competitive markets are “efficient” -- they lead to maximum total surplus. The price rationing mechanism allocates output to.....
Chapter Externalities 10. Externalities Externality – The uncompensated impact of one person’s actions on the well-being of a bystander – Market failure.
Notes appear on slides 4, 8, 10, and 33.
Review for Exam 1 Chapters 1 Through 5. Production Possibilities Frontiers and Opportunity Costs Learning Objective 2.1 Production possibilities frontier.
Environmental Economics Week 2 MARKET FAILURE AND ENVIRONMENTAL ECONOMICS READING: Common: Chapter 4 Perman et al: Chapter 5 and 6.
Externalities CHAPTER 8 When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Explain why negative.
Five c h a p t e r © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. Prepared by: Fernando & Yvonn.
Externalities.
Modeling Market Failure Chapter 3 © 2004 Thomson Learning/South-Western.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.1 Chapter 14: Market Failures and Government Policy Prepared by: Kevin Richter, Douglas College.
Dr. Laura Dawson Ullrich March 25, Q per year $ MB MD MPC MSC = MPC + MD Q1Q1 Q* Actual output Socially efficient output b a c.
Introduction Externalities arise whenever the actions of one party make another party worse or better off, yet the first party neither bears the costs.
Dr. D. Foster Microeconomics Market Failure (?): Public Goods, Common Property & Externalities.
Externalities and Public Policy
1 ENV 536: Environmental Economics and Policy (Lecture 4) Modeling Market Failure Asst.Prof. Dr. Sasitorn Suwannathep School of Liberal Arts King Mongkut’s.
Across the country, countless people have protested, even risking arrest, against the Keystone XL Pipeline. (Credit: modification of image by “NoKXL”/Flickr.
17 ECONOMICS OF THE ENVIRONMENT © 2012 Pearson Education.
16 Externalities After studying this chapter you will be able to  Explain how externalities arise  Explain why negative externalities lead to inefficient.
McGraw-Hill/Irwin Chapter 5: Public Goods and Externalities Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
16 Public Goods and Common Resources Notes and teaching tips: 13.
Public Goods and Common Property Resources Chapter 11.
Externalities ECO 230 J.F. O’Connor. Topics Nature of externalities Why do externalities cause market failure Private solutions to an externality problem.
Externalities CHAPTER 9 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Explain why negative.
Macroeconomics ECON 2302 May 2009 Marilyn Spencer, Ph.D. Professor of Economics Chapter 5.
Externalities: Problems and Solutions
10 Externalities.
10 Externalities CHAPTER. 10 Externalities CHAPTER.
10 Externalities.
C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to Explain why negative externalities lead to inefficient.
Externalities and the Environment
Presentation transcript:

Chapter 11: Externalities & Property Rights Part I

Externality An externality (or spillover) is a cost or benefit arising from an economic activity that falls on people who do not participate in that activity. Disposal of chemical wastes in a river (negative production externality) Proving a mathematical theorem (positive production externality) Consumption of Liquor (negative consumption externality) Consumption of education (positive consumption externality)

How effective do the private resolve the problem of externalities Consider a doctor whose ability to examine patients is disrupted by the noise of machinery operated by a confectioner (candy maker) in an adjacent building. Historically, the economic and legal view is simple and clear: the confectioner’s noise is harming the doctor and should be restrained. Challenge by Coase (1960): The confectioner’s noise does harm the doctor. But if we prevent the noise, we harm the confectioner.

The Coase Theorem Suppose the damage inflicted to the doctor is 40, while the gain the confectioner receives from operating the shop is 60. When bargaining cost is low, the same efficient outcome prevails (the confectioner will keep on operating). If confectioner is liable for his damage to the doctor, he will pay the doctor in order to harass him. If not, the confectioner will simply ignore the doctor and keep on operating. Coase theorem states that: When the parties affected by externalities can negotiate costlessly with one another, the efficient outcome results no matter how the law assigns liability for damages. (In the absence of transaction cost, ownership does not matter.)

Gain to the confectioner from operating w/o soundproofing: 60; soundproofing costs 20; loss to the doctor: 40; cost of negotiation: 25. In the presence of negotiation costs, the efficient outcome (confectioner to install soundproofing) emerges only when he is made liable for noise damage.

Is Coase theorem relevant? Why the Coase theorem may not work in practice? Sunk costs--the one who initiates the negotiation will have some cost sunk upfront. Transaction costs--costs of negotiating, writing and enforcing a contract. Multiple parties--the issue may involve a large number of people, and reaching an arrangement among such a large number of people is prohibitively difficult.

Some applications of the Coase theorem why smoking in public is prohibited but in private is not? why protecting freedom of speech when it could be wrongly used? For a developer to build a hotel in the airspace above my land, he must first secure my permission. But the law permits commercial airliners to fly over my land without payment whenever they choose. Why this distinction?

Externality and Supply Curve quantity Supply based on private cost only Supply after taking external cost into consideration External cost per unit of output =marginal external cost

Negative Production Externality Leads to Overproduction Quantity (tons of Aluminum) Price, cost, and benefit (dollars/ton of Al) C1C1 0 D Supply when externality is taken into account P0P0 P1P1 SC 0 Q1Q1 Q0Q0 Supply when externality is not taken into account Pollution cost (External cost) Competitive equilibrium Point of allocative efficiency

Public Policy on Externalities Government has a wide range of measures to deal with negative production externalities (e.g. chemical waste) Complete prohibition Quantity Restriction Pollution tax (Pigou tax) Marketable Permits Improvement in Pollution Abatement Technology

Quantity Restriction vs Pigou Tax Suppose there are two firms A and B each releasing 600 tons of wastes into water each year. And the government wants to restrict to a total of 600 tons each year. It could restrict each firm to release up to 300 tons of waste a year. (quantity restriction) Taxes can be used to provide incentives for firms A and B to cut back on its production that creates external costs. For instance, levy a pollution tax of $20K/ton of waste. (Pigou tax)

Quantity Restriction vs Pigou Tax Suppose both measures can achieve the 600 tons target. Then which is better? Most economists think that taxation is better than quantity restriction. Suppose the cost of abatement for firm A is $10K per ton and for firm B is $50K per ton. Then each reducing to 300 tons of wastes requires a total cost of $10K x $50K x 300 = $18M.

Quantity Restriction vs Pigou Tax Clearly, the least costly way is to let firm A do all the abatement. Total cost = $10K X 600 = $6M. To implement this outcome, the government can levy a pollution tax of $20K per ton. Then firm A will do all the abatement.

Marketable Permits Besides Pigou tax, government can also issue marketable permits to all involving firms. e.g. Issue a permit to firm A and firm B, respectively, to allow each of them to release up to 300 tons of waste a year. Then firm B will buy a permit of 300 tons from firm A to release up to 600 tons of waste. Market Environmentalism!!! Issuing marketable permits requires the least information on the part of government about the industry. Currently used by the EU countries to control carbon dioxide release.

Part II Public Goods and Common Resources

Nonrivalry and Nonexcludability Non-rivalry A good is nonrival if the consumption by one person does not decrease the consumption by another Non-excludability A good is nonexcludable if it is impossible, or extremely costly, to prevent someone from benefiting from a good

Public Goods and Private Goods Fish in the ocean Air Congested highway Pure private goodsClub goods Common resourcesPure public goods Food Car House Cable television Bridge, Non- congested toll road Lighthouse National defense Non-cong. highway Rival? YesNo Excludable? No Yes

Fisheries--Many fisheries have common access such that anyone can fish and no one has a property right to a fish until it is caught. Many species have been driven to extinction. The catch of Atlantic cod fell from about 4 million tons in the mid-60s to about 1 million tons today due to overfishing. The tragedy of commons! Common Resource

Case: Easter Island: tragedy of commons? Easter Island is a small Pacific island over 3,200 km from the coast of Chile, with a population of 2.1k. Viewed as a major archaeological and anthropological mystery.

Enormous statues, carved from volcanic stone. Many rested on large platforms at various locations on the island largest “moveable” statues weigh > 80 tons the largest yet unfinished weighs ~ 270 tons Easter Island

the culture seemed too poor to support a large artisan class the statues were moved substantial distances; the population too small to move the larger statues the island had no trees suitable for making tools such as levers, rollers, rope and wooden sleds Conclusion: rising wealth and rising population, followed by decline.

Easter Island: Brander & Taylor (1998, AER) To explain: the cyclical overshooting on Easter Island vs the monotonic behavior on the major Polynesian islands All else the same: no a priori reason to believe difference in demographics, tastes, or technology. The only variable: nature of resource. palm tree on Easter Island is a very slow-growing palm (40 to 60 years to yield fruit). It grows nowhere else in Polynesia, and probably the only palm that can live in Easter Island’s relatively cool climate.

Easter Island: Brander & Taylor The two most common large palms in Polynesia are the Cocos (cononut palm) and the Pritchardia (Fuji fan palm). Neither of these palms can grow on Easter Island, and both are fast-growing trees that reach fruit-growing age in approximately 7 to 10 years.

Resource and population dynamics: slow regeneration population Resource stock Year (A.D.) Resource and population stock 0 12,000 Key parameter: resource growth rate: 0.04

Resource and population dynamics: fast regeneration population Resource stock Year (A.D.) Resource and population stock 0 12,000 Key parameter: resource growth rate: 0.35