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1、Week7bExternalitiesWeek7bExternalities 2016 Pearson Education Australia10When you have completed your study of this chapter, you will be able to1 Explain why negative externalities lead to inefficient overproduction and how property rights, pollution charges and taxes can achieve a more efficient ou
2、tcome.2 Explain why positive externalities lead to inefficient underproduction and how public provision and subsidies can achieve a more efficient outcome.LEARNING OBJECTIVESExternalities 2016 Pearson Education AustraliaAn externality is a cost or a benefit that arises from:Production that falls on
3、someone other than the producerConsumption that falls on someone other than the consumerNegative externalityA production or consumption activity that creates an external cost.Positive externalityA production or consumption activity that creates an external benefit.EXTERNALITIES IN OUR DAILY LIVES 20
4、16 Pearson Education AustraliaNegative Production ExternalitiesPollution is the major example of this type of externality. Others are noise and congestion.Positive Production ExternalitiesExample: investment in R&D, which turns out successful and benefits the whole society. Another example: Honey pr
5、oduction and Orchards produce positive externality on each other. Negative Consumption ExternalitiesSmoking tobacco in a confined space. Noisy parties.Positive Consumption ExternalitiesEducation is a major example of this type of externality.Others are a flu vaccination and restoration of an histori
6、c building.EXTERNALITIES IN OUR DAILY LIVES 2016 Pearson Education Australia10.1 NEGATIVE EXTERNALITIES: POLLUTIONPrivate Costs and Social CostsMarginal private cost is the cost of producing an additional unit of a good or service that is borne by the producer of that good or service.Marginal extern
7、al cost is the cost of producing an additional unit of a good or service that falls on people other than the producer.Marginal social cost is the marginal cost incurred by the entire societyby the producer and by everyone else on whom the cost falls. Marginal social cost (MSC) is the sum of marginal
8、 private cost (MC) and marginal external cost.MSC = MC + Marginal external cost 2016 Pearson Education Australia10.1 NEGATIVE EXTERNALITIES: POLLUTIONProduction and Pollution: How Much?When an industry is unregulated, the amount of pollution it creates depends on the market equilibrium price and the
9、 quantity of the good produced.When output level is 4 million litres of paint a month: 1.Marginal private cost is $1.00 a litre.2.Marginal external cost is $1.25 a litre.3.Marginal social cost is $2.25 a litre. 2016 Pearson Education Australia10.1 NEGATIVE EXTERNALITIES: POLLUTIONIf the industry cre
10、ates an external cost, the market equilibrium is inefficient. Too much of the good is produced.Marginal social cost exceeds marginal benefit.The efficient quantity is 2 million litres of paint, where marginal social cost equals marginal benefit.The gray triangle shows the deadweight loss created by
11、the pollution externality. 2016 Pearson Education Australia10.1 NEGATIVE EXTERNALITIES: POLLUTIONFixing the Inefficient OverproductionThree ways of dealing with externalities to avoid the overproduction they bring areEstablish property rightsMandate clean technologyTax or price pollution 2016 Pearso
12、n Education Australia10.1 NEGATIVE EXTERNALITIES: POLLUTIONEstablish Property RightsExternalities arise when property rights are missing.Property rights are legally established titles to the ownership, use, and disposal of factors of production and goods and services that are enforceable in the cour
13、ts.Establishing property rights is one way of dealing with externalities 2016 Pearson Education Australia10.1 NEGATIVE EXTERNALITIES: POLLUTIONTo see how property rights can work, suppose the paint producers own the homes and the river. The rental income they can earn on the homes depends on the amo
14、unt of pollution they create.The effect of pollution on rental income gives the paint producers an incentive to limit pollution.They might limit pollution by: Using an abatement technology Decreasing productionFirms will chose the least-cost alternative method.This can be explained using Coase Theor
15、em. 2016 Pearson Education Australia10.1 NEGATIVE EXTERNALITIES: POLLUTIONThe Coase TheoremCoase theorem is the proposition that if property rights exist, only a small number of parties are involved and transactions costs are low, then private transactions are efficient and the outcome is not affect
16、ed by who is assigned the property right.Transactions costs are the opportunity costs of conducting a transaction. 2016 Pearson Education Australia10.1 NEGATIVE EXTERNALITIES: POLLUTIONApplication of the Coase TheoremIf polluting paint factories own homes and river, the rent people willingly pay dec
17、reases as the amount of pollution increases. If homeowners own the river, the factories must pay homeowners for any pollution, and the more the factories pollute, the more they pay.Regardless of who owns the river, so long as someone owns it, the factories bear the cost of pollution, and the quantit
18、y of production and pollution are efficient. 2016 Pearson Education Australia10.1 NEGATIVE EXTERNALITIES: POLLUTIONMandate Clean TechnologyGovernments regulate what may be dumped in rivers and lakes and emitted into the atmosphere.The Environmental Protection and Biodiversity Conservation Act of 199
19、9 gives the Department of the Environment the authority to issue regulations that limit emissions and achieve defined air quality standards.State and territory governments have similar legislation and regulations. 2016 Pearson Education Australia10.1 NEGATIVE EXTERNALITIES: POLLUTIONTax or Price Pol
20、lutionGovernments use two methods to confront polluters with the costs of their decisions: Taxes Cap-and tradeTo work out the pollution charge or pollution tax that achieves efficiency, the regulator needs a lot of information about the industry, which is generally not available. 2016 Pearson Educat
21、ion Australia10.1 NEGATIVE EXTERNALITIES: POLLUTIONTaxesBy setting the tax equal to the marginal external cost (or marginal abatement cost if it is lower), firms can be made to behave in the same way as they would if they bore the cost of the externality directly.To see how a tax works, assume that
22、the government has assessed the marginal external cost of pollution accurately and imposes a tax on the factories that exactly equals this cost. 2016 Pearson Education Australia 2016 Pearson Education Australia10.1 NEGATIVE EXTERNALITIES: POLLUTIONCap-and-TradeCap-and-trade places a cap or ceiling o
23、n emissions and assigns or sells emission rights to individual producers who are then free to trade permits.It is a tool that seeks to combine the power of government to limit total emissions with the power of the market to minimise cost and maximise benefit.To use this method, the government must f
24、irst estimate the efficient quantity of pollution, set the overall emissions cap to achieve the efficient outcome and allocate the cap to producers. 2016 Pearson Education Australia10.1 NEGATIVE EXTERNALITIES: POLLUTIONThe market in permits determines the equilibrium price of emissions.Each firm, co
25、nfronted with that price, maximises profit by setting its marginal pollution cost or marginal abatement cost, whichever is lower, equal to the market price of a permit. By confronting polluters with a price of pollution, trade in pollution permits can achieve the same efficient outcome as a tax. 201
26、6 Pearson Education Australia10.2 POSITIVE EXTERNALITIES: EDUCATIONPrivate Benefits and Social BenefitsMarginal private benefit is the benefit of an additional unit of a good or service that the consumer of that good or service receives.Marginal external benefit is the benefit of an additional unit
27、of a good or service that people other than the consumer of the good or service enjoy.Marginal social benefit is the marginal benefit enjoyed by societyby the consumer of a good or service and by everyone else who benefits from it. Marginal social benefit (MSB) is the sum of marginal private benefit
28、 (MB) and marginal external benefit.MSB = MB + Marginal external benefit 2016 Pearson Education Australia10.2 POSITIVE EXTERNALITIES: EDUCATIONProduction and Education: How Much?The amount of positive externality depends on the market equilibrium price and the quantity of the good produced.When 1.2
29、million students attend university:1.Marginal private benefit is $10,000 per student.2.Marginal external benefit is $15,000 per student.3.Marginal social benefit is $25,000 per student. 2016 Pearson Education Australia10.2 POSITIVE EXTERNALITIES: EDUCATIONIf the industry creates an external benefit,
30、 the market equilibrium is inefficient. Too less of the good is produced.Marginal social benefit exceeds Marginal cost.The efficient number of students is 1.2 million.The grey triangle shows the deadweight loss created because too few students enrol in university. 2016 Pearson Education Australia10.
31、2 POSITIVE EXTERNALITIES: EDUCATIONGovernment Actions In the Face of External BenefitsTwo devices that governments can use to achieve a more efficient allocation of resources in the presence of external benefits: Public provision: is the production of a good or service by a public authority that rec
32、eives the bulk of its revenue from the government. Subsidy: is a payment that the government makes to private producers to cover part of the costs of production. 2016 Pearson Education Australia10.2 POSITIVE EXTERNALITIES: EDUCATIONPublic ProvisionMarginal social benefit equals marginal cost with 1.
33、2 million students attend university.The efficient quantity of tuition is $10,000 per year.Taxpayers cover the remaining $15,000 of marginal cost per student. 2016 Pearson Education Australia10.2 POSITIVE EXTERNALITIES: EDUCATIONSubsidy A $15,000 subsidy per student shifts the supply curve toS = MC subsidy. The dollar price is $10,000 per student per year.The market equilibrium is efficient with 1.2 million students attending university.Marginal social benefit equals marginal cost. 2016 Pearson Education AustraliaNext: Public Goods结束结束
