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1、Chapter 18Externalities and Externalities and Public GoodsPublic Goods1外部性与公共物品课件外部性与公共物品课件Topics to be DiscussednExternalitiesnWays of Correcting Market FailurenExternalities and Property RightsnCommon Property Resources2外部性与公共物品课件外部性与公共物品课件Topics to be DiscussednPublic GoodsnPrivate Preferences fo
2、r Public Goods3外部性与公共物品课件外部性与公共物品课件ExternalitiesnNegativelAction by one party imposes a cost on another partynPositivelAction by one party benefits another party4外部性与公共物品课件外部性与公共物品课件External CostnScenariolSteel plant dumping waste in a riverlThe entire steel market effluent can be reduced by lowerin
3、g output (fixed proportions production function)5外部性与公共物品课件外部性与公共物品课件External CostnScenariolMarginal External Cost (MEC) is the cost imposed on fishermen downstream for each level of production.lMarginal Social Cost (MSC) is MC plus MEC.6外部性与公共物品课件外部性与公共物品课件MCS = MCIDP1Aggregate social cost ofnegati
4、veexternalityP1q1Q1MSCMSCIWhen there are negativeexternalities, the marginalsocial cost MSC is higherthan the marginal cost.External CostsFirm outputPriceIndustry outputPriceMECMECIThe differences isthe marginal externalcost MEC.q*P*Q*The industry competitiveoutput is Q1 while the efficientlevel is
5、Q*. The profit maximizing firmproduces at q1 while the efficient output level is q*. 7外部性与公共物品课件外部性与公共物品课件External CostnNegative Externalities encourage inefficient firms to remain in the industry and create excessive production in the long run.8外部性与公共物品课件外部性与公共物品课件ExternalitiesnPositive Externaliti
6、es and InefficiencylExternalities can also result in too little production, as can be shown in an example of home repair and landscaping.9外部性与公共物品课件外部性与公共物品课件MCP1External BenefitsRepair LevelValueDIs research and development discouraged by positiveexternalities?q1MSBMEBWhen there are positiveexterna
7、lities (the benefitsof repairs to neighbors),marginal social benefitsMSB are higher thanmarginal benefits D.q*P*A self-interested home ownerinvests q1 in repairs. Theefficient level of repairsq* is higher. The higher priceP1 discourages repair.10外部性与公共物品课件外部性与公共物品课件Ways of Correcting Market Failuren
8、Assumption: The market failure is pollutionlFixed-proportion production technologyuMust reduce output to reduce emissionsuUse an output tax to reduce outputlInput substitution possible by altering technology11外部性与公共物品课件外部性与公共物品课件The Efficient Level of EmissionsLevel of Emissions246Dollarsper unitof
9、Emissions02468101214161820222426MSCMCAE*The efficient level ofemissions is 12 (E*) where MCA = MSC.Assume:1) Competitive market2) Output and emissions decisions are independent3) Profit maximizing output chosenAt Eo the marginalcost of abating emissionsis greater than themarginal social cost.E0At E1
10、 the marginalsocial cost is greaterthan the marginal benefit.E1Why is this more efficientthan zero emissions?12外部性与公共物品课件外部性与公共物品课件Ways of Correcting Market FailurenOptions for Reducing Emissions to E*lEmission StandarduSet a legal limit on emissions at E* (12)uEnforced by monetary and criminal pena
11、ltiesuIncreases the cost of production and the threshold price to enter the industry13外部性与公共物品课件外部性与公共物品课件Standards and FeesLevel of EmissionsDollarsper unitof EmissionsMSCMCA312E*StandardFee14外部性与公共物品课件外部性与公共物品课件nOptions for Reducing Emissions to E*lEmissions FeeuCharge levied on each unit of emiss
12、ionWays of Correcting Market Failure15外部性与公共物品课件外部性与公共物品课件TotalAbatement CostCost is less than thefee if emissions were not reduced.Total Feeof AbatementStandards and FeesLevel of EmissionsDollarsper unitof EmissionsMSCMCA312E*Fee16外部性与公共物品课件外部性与公共物品课件nStandards Versus FeeslAssumptionsuPolicymakers
13、have asymmetric informationuAdministrative costs require the same fee or standard for all firmsWays of Correcting Market Failure17外部性与公共物品课件外部性与公共物品课件Firm 2s ReducedAbatementCostsFirm 1s IncreasedAbatement CostsMCA1MCA2The Case for FeesLevel of Emissions246Fee perUnit ofEmissions01234567891011121313
14、514The cost minimizing solutionwould be an abatement of 6for firm 1 and 8 for firm 2 andMCA1= MCA2 = $3.3.752.50The impact of a standard ofabatement of 7 for both firmsis illustrated.Not efficient becauseMCA2 MCA1.If a fee of $3 was imposedFirm 1 emissions would fallby 6 to 8. Firm 2 emissionswould
15、fall by 8 to 6.MCA1 = MCA2: efficient solution.18外部性与公共物品课件外部性与公共物品课件nAdvantages of FeeslWhen equal standards must be used, fees achieve the same emission abatement at lower cost.lFees create an incentive to install equipment that would reduce emissions further.Ways of Correcting Market Failure19外部性
16、与公共物品课件外部性与公共物品课件ABC is the increasein social cost less thedecrease in abatementcost.MarginalSocialCostMarginal Costof AbatementThe Case for StandardsLevel of EmissionsFee perUnit ofEmissions0246810121416246810121416EBased on incompleteinformation standard is 9(12.5% decrease).ADE m*.32外部性与公共物品课件外部性
17、与公共物品课件Refundable DepositsAmount of Glass$DPrice falls to P and the amount of recycled glass increases to M*.SvSrSThe supply of glass is the sum of the supplyof virgin glass (Sr) and the supply of recycledglass (Sr).M1PWithout refunds the price of glass is P and Sr is M1.SrSPM*With refunds Sr increa
18、sesto Sr and S increases to S.33外部性与公共物品课件外部性与公共物品课件Externalities and Property RightsnProperty RightslLegal rules describing what people or firms may do with their propertylFor exampleuIf residents downstream owned the river (clean water) they control upstream emissions.34外部性与公共物品课件外部性与公共物品课件nBargai
19、ning and Economic EfficiencylEconomic efficiency can be achieved without government intervention when the externality affects relatively few parties and when property rights are well specified.Externalities and Property Rights35外部性与公共物品课件外部性与公共物品课件Profits Under AlternativeEmissions Choices (Daily)No
20、 filter, not treatment plant500100600Filter, no treatment plant300500800No filter, treatment plant500200700Filter, treatment plant300300600FactorysFishermensTotalProfitProfitProfit36外部性与公共物品课件外部性与公共物品课件nAssumptionslFactory pays for the filterlFishermen pay for the treatment plantnEfficient Solutionl
21、Buy the filter and do not build the plantExternalities and Property Rights37外部性与公共物品课件外部性与公共物品课件Bargaining with Alternative Property RightsNo CooperationProfit of factory$500$300Profit of fishermen$200$500CooperationProfit of factory$550$300Profit of fishermen$250$500Right to Dump Right to Clean Wat
22、er38外部性与公共物品课件外部性与公共物品课件nConclusion: Coase TheoremlWhen parties can bargain without cost and to their mutual advantage, the resulting outcome will be efficient, regardless of how the property rights are specified.Externalities and Property Rights39外部性与公共物品课件外部性与公共物品课件nCostly Bargaining - The Role of
23、 Strategic BehaviorlBargaining requires clearly defined rules and property rights.Externalities and Property Rights40外部性与公共物品课件外部性与公共物品课件nA Legal Solution - Suing for DamageslFishermen have the right to clean waterlFactory has two optionsuNo filter, pay damageslProfit = $100 ($500 - $400)uFilter, no
24、 damageslProfit = $300 ($500 - $200)Externalities and Property Rights41外部性与公共物品课件外部性与公共物品课件nA Legal Solution - Suing for DamageslFactory has the right to emit effluentlFishermen have three optionsuPut in treatment plantlProfit = $200uFilter and pay damageslProfit = $300 ($500 - $200)uNo plant, no fi
25、lterlProfit = $100Externalities and Property Rights42外部性与公共物品课件外部性与公共物品课件nConclusionlA suit for damages results in an efficient outcome.nQuestionlHow would imperfect information impact the outcome?Externalities and Property Rights43外部性与公共物品课件外部性与公共物品课件The Coase Theorem at WorknNegotiating an Efficie
26、nt Solutionl1987 - New York garbage spill (200 tons) littered the New Jersey beachesuThe potential cost of litigation resulted in a solution that was mutually beneficial to both parties.44外部性与公共物品课件外部性与公共物品课件Common Property ResourcesnCommon Property ResourcelEveryone has free access.lLikely to be ov
27、erutilizedlExamplesuAir and wateruFish and animal populationsuMinerals45外部性与公共物品课件外部性与公共物品课件Common Property ResourcesFish per MonthBenefits,Costs($ perfish)DemandHowever, private costsunderestimate true cost.The efficient level of fish/month is F* whereMSC = MB (D)Marginal Social CostF*Private CostF
28、CWithout control the numberof fish/month is FC where PC = MB.46外部性与公共物品课件外部性与公共物品课件Common Property ResourcesnSolutionlPrivate ownershipnQuestionlWhen would private ownership be impractical?47外部性与公共物品课件外部性与公共物品课件Crawfish Fishing in LousiananFinding the Efficient Crawfish CatchlF = crawfish catch in m
29、illions of pounds/yrlC = cost in dollars/pound48外部性与公共物品课件外部性与公共物品课件Crawfish Fishing in LousiananDemandlC = 0.401 = 0.0064FnMSClC = -5.645 + 0.6509FnPClC = -0.357 + 0.0573F49外部性与公共物品课件外部性与公共物品课件Crawfish Fishing in LousiananEfficient Catchl9.2 million poundslD = MSC50外部性与公共物品课件外部性与公共物品课件Crawfish Catc
30、h(millions of pounds)CCost(dollars/pound)DemandMarginal Social CostPrivate CostCrawfish as a CommonProperty Resource11.92.109.20.32551外部性与公共物品课件外部性与公共物品课件Public GoodsnQuestionlWhen should government replace firms as the producer of goods and services?52外部性与公共物品课件外部性与公共物品课件Public GoodsnPublic Good Ch
31、aracteristicslNonrivaluFor any given level of production the marginal cost of providing it to an additional consumer is zero.lNonexclusiveuPeople cannot be excluded from consuming the good.53外部性与公共物品课件外部性与公共物品课件Public GoodsnNot all government produced goods are public goodslSome are rival and nonexc
32、lusiveuEducationuParks54外部性与公共物品课件外部性与公共物品课件D1D2DWhen a good is nonrival, the social marginalbenefit of consumption (D) , is determined byvertically summing the individual demand curves for the good.Efficient Public Good ProvisionOutput0Benefits(dollars)12345678109$4.00$5.50$7.00Marginal Cost$1.50Ef
33、ficient output occurswhere MC = MB at 2units of output. MB is$1.50 + $4.00 or $5.50.55外部性与公共物品课件外部性与公共物品课件Public GoodsnPublic Goods and Market FailurelHow much national defense did you consume last week?56外部性与公共物品课件外部性与公共物品课件Public GoodsnFree RiderslThere is no way to provide some goods and services
34、 without benefiting everyone.lHouseholds do not have the incentive to pay what the item is worth to them.lFree riders understate the value of a good or service so that they can enjoy its benefit without paying for it.57外部性与公共物品课件外部性与公共物品课件Public GoodsnEstablishing a mosquito abatement companylHow do
35、 you measure output?lWho do you charge?lA mosquito meter?58外部性与公共物品课件外部性与公共物品课件The Demand for Clean AirnClean Air is a public goodlNonexclusive and nonrivalnWhat is the price of clean air?59外部性与公共物品课件外部性与公共物品课件The Demand for Clean AirnChoosing where to livelStudy in Boston correlates housing prices
36、with the quality of air and other characteristics of the houses and their neighborhoods.60外部性与公共物品课件外部性与公共物品课件The Demand for Clean AirNitrogen Oxides (pphm)0Dollars1234567810920002500300050015001000Low IncomeMiddle IncomeHigh Income61外部性与公共物品课件外部性与公共物品课件The Demand for Clean AirnFindingslAmount peopl
37、e are willing to pay for clean air increases substantially as pollution increases.lHigher income earners are willing to pay more (the gap between the demand curves widen)lNational Academy of Sciences found that a 10% reduction in auto emissions yielded a benefit of $2 billion-somewhat greater than t
38、he cost.62外部性与公共物品课件外部性与公共物品课件Private Preferences for Public GoodsnGovernment production of a public good is advantageous because the government can assess taxes or fees to pay for it.nDetermining how much of a public good to provide when free riders exist is difficult.63外部性与公共物品课件外部性与公共物品课件Determin
39、ing the Levelof Educational SpendingEducational spendingper pupil$0Willingnessto pay$1200$600$1800$2400W1W2W3AWThe efficient level of educational spending is determined by summing thewillingness to pay for education for eachof three citizens.64外部性与公共物品课件外部性与公共物品课件Determining the Levelof Educational
40、SpendingEducational spendingper pupil$0Willingnessto pay$1200$600$1800$2400W1W2W3AWWill majority rule yield an efficient outcome?W1 will vote for $600W2 and W3 will vote for $1200The median vote will always win in a majorityrule election.65外部性与公共物品课件外部性与公共物品课件nQuestionlWill the median voter selectio
41、n always be efficient?nAnswerlIf two of the three preferred $1200 there would be overinvestment.lIf two of the three preferred $600 there would be underinvestment.Private Preferences for Public Goods66外部性与公共物品课件外部性与公共物品课件nMajority rule is inefficient because it weighs each citizens preference equall
42、y-the efficient outcome weighs each citizens vote by his or her strength of preference.Private Preferences for Public Goods67外部性与公共物品课件外部性与公共物品课件SummarynThere is an externality when a producer or a consumer affects the production or consumption activities of others in a manner that is not directly r
43、eflected in the market.nPollution can be corrected by emission standards, emissions fees, marketable emissions permits, or by encouraging recycling.68外部性与公共物品课件外部性与公共物品课件SummarynInefficiencies due to market failure may be eliminated through private bargaining among the affected parties.nCommon prope
44、rty resources are not controlled by a single person and can be used without a price being paid.69外部性与公共物品课件外部性与公共物品课件SummarynGoods that private markets are not likely to produce efficiently are either nonrival or nonexclusive. Public goods are both.nA public good is provided efficiently when the ver
45、tical sum of the individual demands for the public good is equal to the marginal cost of producing it.70外部性与公共物品课件外部性与公共物品课件SummarynUnder majority rule voting, the level of spending provided will be that preferred by the median voter-this need not be the efficient outcome.71外部性与公共物品课件外部性与公共物品课件 End of Chapter 18Externalities and Externalities and Public GoodsPublic Goods72外部性与公共物品课件外部性与公共物品课件
