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1、,Chapter 18,Externalities and Public Goods,Topics to be Discussed,Externalities Ways of Correcting Market Failure Externalities and Property Rights Common Property Resources,2,Chapter 1,Topics to be Discussed,Public Goods Private Preferences for Public Goods,3,Chapter 1,Externalities,Negative Action
2、 by one party imposes a cost on another party Positive Action by one party benefits another party,4,Chapter 1,External Cost,Scenario Steel plant dumping waste in a river The entire steel market effluent can be reduced by lowering output (fixed proportions production function),5,Chapter 1,External Co
3、st,Scenario Marginal External Cost (MEC) is the cost imposed on fishermen downstream for each level of production. Marginal Social Cost (MSC) is MC plus MEC.,6,Chapter 1,External Costs,Firm output,Price,Industry output,Price,External Cost,Negative Externalities encourage inefficient firms to remain
4、in the industry and create excessive production in the long run.,8,Chapter 1,Externalities,Positive Externalities and Inefficiency Externalities can also result in too little production, as can be shown in an example of home repair and landscaping.,9,Chapter 1,Chapter 1,Slide 10,External Benefits,Re
5、pair Level,Value,Is research and development discouraged by positive externalities?,Ways of Correcting Market Failure,Assumption: The market failure is pollution Fixed-proportion production technology Must reduce output to reduce emissions Use an output tax to reduce output Input substitution possib
6、le by altering technology,11,Chapter 1,Chapter 1,Slide 12,The Efficient Level of Emissions,Level of Emissions,2,4,6,Dollars per unit of Emissions,0,2,4,6,8,10,12,14,16,18,20,22,24,26,Assume: 1) Competitive market 2) Output and emissions decisions are independent 3) Profit maximizing output chosen,Wh
7、y is this more efficient than zero emissions?,Ways of Correcting Market Failure,Options for Reducing Emissions to E* Emission Standard Set a legal limit on emissions at E* (12) Enforced by monetary and criminal penalties Increases the cost of production and the threshold price to enter the industry,
8、13,Chapter 1,Chapter 1,Slide 14,Standards and Fees,Level of Emissions,Dollars per unit of Emissions,Options for Reducing Emissions to E* Emissions Fee Charge levied on each unit of emission,Ways of Correcting Market Failure,15,Chapter 1,Chapter 1,Slide 16,Standards and Fees,Level of Emissions,Dollar
9、s per unit of Emissions,Standards Versus Fees Assumptions Policymakers have asymmetric information Administrative costs require the same fee or standard for all firms,Ways of Correcting Market Failure,17,Chapter 1,Chapter 1,Slide 18,The Case for Fees,Level of Emissions,2,4,6,Fee per Unit of Emission
10、s,0,1,2,3,4,5,6,7,8,9,10,11,12,13,1,3,5,14,The cost minimizing solution would be an abatement of 6 for firm 1 and 8 for firm 2 and MCA1= MCA2 = $3.,Advantages of Fees When equal standards must be used, fees achieve the same emission abatement at lower cost. Fees create an incentive to install equipm
11、ent that would reduce emissions further.,Ways of Correcting Market Failure,19,Chapter 1,Chapter 1,Slide 20,The Case for Standards,Level of Emissions,Fee per Unit of Emissions,0,2,4,6,8,10,12,14,16,2,4,6,8,10,12,14,16,Summary: Fees vs. Standards Standards are preferred when MSC is steep and MCA is fl
12、at. Standards (incomplete information) yield more certainty on emission levels and less certainty on the cost of abatement.,Ways of Correcting Market Failure,21,Chapter 1,Summary: Fees vs. Standards Fees have certainty on cost and uncertainty on emissions. Preferred policy depends on the nature of u
13、ncertainty and the slopes of the cost curves.,Ways of Correcting Market Failure,22,Chapter 1,Transferable Emissions Permits Permits help develop a competitive market for externalities. Agency determines the level of emissions and number of permits Permits are marketable High cost firm will purchase
14、permits from low cost firms,Ways of Correcting Market Failure,23,Chapter 1,Question What factors could limit the efficiency of this approach?,Ways of Correcting Market Failure,24,Chapter 1,The Costs and Benefitsof Reduced Sulfur Dioxide Emissions,Cost of Reducing Emissions Conversion to natural gas
15、from coal and oil Emission control equipment,25,Chapter 1,Benefits of Reducing Emissions Health Reduction in corrosion Aesthetic,The Costs and Benefitsof Reduced Sulfur Dioxide Emissions,26,Chapter 1,Chapter 1,Slide 27,Sulfur Dioxide Emissions Reductions,Sulfur dioxide concentration (ppm),20,40,60,0
16、,Dollars per unit of reduction,0.02,0.04,0.06,0.08,Observations MAC = MSC .0275 .0275 is slightly below actual emission level Economic efficiency improved,Emissions Trading and Clean Air,Bubbles Firm can adjust pollution controls for individual sources of pollutants as long as a total pollutant limit is not exceeded. Offsets New emissions must be offset by reducing existing emissions 2000 offsets since 1979,2
