Economics Chapter 16 Externalities in Our Lives ⢠Externality o Cost ...
Economics Chapter 16 Externalities in Our Lives
Externality o Cost or a benefit that arises from production and falls on someone other than the producer o Cost or benefit that arises from consumption and falls on someone other than the consumer Negative Externality – externality that imposes a cost Positive Externality – externality that provides a benefit
-Negative Production Externalities
Congestion – traffic, burning additional fuel, every rush-hour diver imposes a cost on the other drivers Pollution and Carbon Emission – increasing carbon footprint o Air pollution – road transportation and industrial process o Water pollution – dumping of industrial waste o Land pollution – dumping toxic waste products
-Negative Consumption Externalities
Smoking Loud outdoor concerts Not picking up leaves Allowing a dog to bark
-Positive Production Externalities
Two things that benefit each other when they work together
-Positive Consumption Externalities
Flu vaccination Building a beautiful building
Negative Externality: Pollution -Private Cost and Social Cost
Private cost – cost that is borne by the producer of a good or service Marginal cost – cost of producing an additional unit of a good or service Marginal private cost (MC) – cost of producing an additional unit of a good or service that is borne by its producer External cost – cost of producing a good or service that is not borne by the producer but borne by other people Marginal external cost – cost of producing an additional unit of a good or service that falls on people other than the producer
Marginal social cost (MSC) – marginal cost incurred by the producer and by everyone else on whom the cost falls – by society MSC = MC + marginal external cost Valuing an External Cost o Amount the external cost poses on the service/product External Cost and Output o MSC and MC curves are upward sloping
-Production and Pollution: How Much?
Amount of pollution created depends on the market equilibrium price and quantity of the good produced Demand curve is downward sloping
-Property Rights
Legally established titles to the ownership, use and disposal of factors of production and goods and services that are enforceable in the courts Efficient when MSB = MSC
-The Coase Theorem
Proposition that if property rights exist, if only a small number of parties are involved, and if transactions costs are low, then private transactions are efficient No externalities Doesn’t matter who has the property rights Application of the Coase Theorem o Coase works when transactions costs are low o Transaction costs – opportunity costs of conduction a transaction
-Government Actions in a Market with External Costs
Taxes o Incentive for producers to cut back the pollution they create Pigovian taxes o Setting tax equal to marginal external cost Emission Charges o Alternative to a tax for confronting a polluter with the external cost of pollution o Price per unit of pollution o More pollution = pay more Cap-and-Trade o Assigned a permitted pollution limit o Firms can trade these permits o High MC = buy, low MC = sell permits o Buy or sell until MC of pollution = Market Price of a permit
A Real-World Market for Emission Permits o EPA
Positive Externality: Knowledge -Private Benefits and Social benefits
Private benefit – benefit that the consumer of a good or service receiver Marginal benefit – benefit firm an additional unit of a good or service Marginal private benefit – benefit that the consumer of a good or service receiver from an additional unit of it External benefit – benefit that someone other than the consumer of the good or service receives Marginal external benefit – benefit from an additional unit of a good or service that people other than its consumer enjoy Marginal social benefit – marginal benefit enjoyed by society – by the consumer of a good or service and by others
-Government Actions in the Face of External Benefits
Public Production o Good or service is produced by a public authority that receives its revenue form the government Private Subsidies o Payment that the government makes to private producers Vouchers o Taken that the government provides to households, which they can use to buy specified goods or services Patents and Copyrights o Intellectual property rights o Legal device for establishing intellectual property rights is the patent or copyright o Government sanctioned exclusive right granted to the inventor of a good, service or productive process to produce, use and sell the invention for a given number of years
Externality o Cost or a benefit that arises from production and falls on someone other than the producer o Cost or benefit that arises from consumption and falls on someone other than the consumer Negative Externality – externality that imposes a cost Positive Externality – externality that provides a benefit
-Negative Production Externalities
Congestion – traffic, burning additional fuel, every rush-hour diver imposes a cost on the other drivers Pollution and Carbon Emission – increasing carbon footprint o Air pollution – road transportation and industrial process o Water pollution – dumping of industrial waste o Land pollution – dumping toxic waste products
-Negative Consumption Externalities
Smoking Loud outdoor concerts Not picking up leaves Allowing a dog to bark
-Positive Production Externalities
Two things that benefit each other when they work together
-Positive Consumption Externalities
Flu vaccination Building a beautiful building
Negative Externality: Pollution -Private Cost and Social Cost
Private cost – cost that is borne by the producer of a good or service Marginal cost – cost of producing an additional unit of a good or service Marginal private cost (MC) – cost of producing an additional unit of a good or service that is borne by its producer External cost – cost of producing a good or service that is not borne by the producer but borne by other people Marginal external cost – cost of producing an additional unit of a good or service that falls on people other than the producer
Marginal social cost (MSC) – marginal cost incurred by the producer and by everyone else on whom the cost falls – by society MSC = MC + marginal external cost Valuing an External Cost o Amount the external cost poses on the service/product External Cost and Output o MSC and MC curves are upward sloping
-Production and Pollution: How Much?
Amount of pollution created depends on the market equilibrium price and quantity of the good produced Demand curve is downward sloping
-Property Rights
Legally established titles to the ownership, use and disposal of factors of production and goods and services that are enforceable in the courts Efficient when MSB = MSC
-The Coase Theorem
Proposition that if property rights exist, if only a small number of parties are involved, and if transactions costs are low, then private transactions are efficient No externalities Doesn’t matter who has the property rights Application of the Coase Theorem o Coase works when transactions costs are low o Transaction costs – opportunity costs of conduction a transaction
-Government Actions in a Market with External Costs
Taxes o Incentive for producers to cut back the pollution they create Pigovian taxes o Setting tax equal to marginal external cost Emission Charges o Alternative to a tax for confronting a polluter with the external cost of pollution o Price per unit of pollution o More pollution = pay more Cap-and-Trade o Assigned a permitted pollution limit o Firms can trade these permits o High MC = buy, low MC = sell permits o Buy or sell until MC of pollution = Market Price of a permit
A Real-World Market for Emission Permits o EPA
Positive Externality: Knowledge -Private Benefits and Social benefits
Private benefit – benefit that the consumer of a good or service receiver Marginal benefit – benefit firm an additional unit of a good or service Marginal private benefit – benefit that the consumer of a good or service receiver from an additional unit of it External benefit – benefit that someone other than the consumer of the good or service receives Marginal external benefit – benefit from an additional unit of a good or service that people other than its consumer enjoy Marginal social benefit – marginal benefit enjoyed by society – by the consumer of a good or service and by others
-Government Actions in the Face of External Benefits
Public Production o Good or service is produced by a public authority that receives its revenue form the government Private Subsidies o Payment that the government makes to private producers Vouchers o Taken that the government provides to households, which they can use to buy specified goods or services Patents and Copyrights o Intellectual property rights o Legal device for establishing intellectual property rights is the patent or copyright o Government sanctioned exclusive right granted to the inventor of a good, service or productive process to produce, use and sell the invention for a given number of years
