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(共36张PPT)
5.1 Externality Theory
5.2 Private-Sector Solutions to Negative Externalities
5.3 Public-Sector Remedies for Externalities
5.4 Distinctions Between Price and Quantity Approaches to Addressing Externalities
5.5 Conclusion
Externalities: Problems and Solutions 5
Introduction to Externalities: Global Warming
5
In 1997, representatives from over 170 nations met in Kyoto, Japan, to negotiate an international pact to limit the emissions of carbon dioxide.
Carbon dioxide emissions contribute to global warming, which could cause enormous damage.
The cost of reducing the use of fossil fuels, particularly in the major industrialized nations, is immense—perhaps 10% of GDP for the United States.
Average Global Temperature, 1880 2014
5
Externalities: Problems and Solutions
5
Global warming is a classic example of an externality, which is a kind of market failure.
Externality: Externalities arise whenever the actions of one party make another party worse or better off, yet the first party neither bears the costs nor receives the benefits of doing so.
Market failure: A problem that causes the market economy to deliver an outcome that does not maximize efficiency.
Negative Externalities
5.1
Negative production externality: When a firm’s production reduces the well-being of others who are not compensated by the firm.
Pollution from steel production, dumped in a river, hurts fishermen.
Negative consumption externality: When an individual’s consumption reduces the well-being of others who are not compensated by the individual.
Smoking at a restaurant affects the health and enjoyment of others.
5.1
Negative production externalities drive a wedge between private and social marginal cost.
Private marginal cost (PMC): The direct cost to producers of producing an additional unit of a good.
Social marginal cost (SMC): The private marginal cost to producers plus any costs associated with the production of the good that are imposed on others.
The loss from pollution is a cost of production imposed on others.
Private and Social Marginal Cost
5.1
Negative consumption externalities drive a wedge between private and social marginal benefit.
Private marginal benefit (PMB): The direct benefit to consumers of consuming an additional unit of a good by the consumer.
Social marginal benefit (SMB): The private marginal benefit to consumers minus any costs associated with the consumption of the good that are imposed on others.
The loss of health or dining pleasure is a cost of smoking imposed on others.
Private and Social Marginal Benefit
5.1
How do externalities affect efficiency
Efficiency requires that SMC = SMB.
The market sets PMC = PMB.
When PMC = SMC and PMB = SMB, the market is efficient.
Production or consumption externalities lead to inefficiency.
Externalities and Efficiency
Economics of Negative Production Externalities:
Steel Production
5.1
Price of
steel
Quantity of steel
B
C
A
Q1
Q2
P1
Deadweight loss
Social marginal cost, SMC = PMC + MD
S = Private marginal cost, PMC
$100 = Marginal damage, MD
D = Private marginal benefit, PMB = Social marginal benefit, SMB
Overproduction
There is overproduction of Q1 – Q2, with an associated deadweight loss of area BCA.
5.1
The consumption of large cars such as SUVs produces three types of negative externalities:
Environmental externalities: Compact cars get 27.6 miles/gallon, but SUVs get only 21.7.
Wear and tear on roads: Larger cars wear down the roads more.
Safety externalities: The odds of having a fatal accident quadruple if the accident is with a typical SUV and not with a car of the same size.
APPLICATION: The Externality of SUVs
5.1
Externalities can be positive as well as negative.
Positive production externality: When a firm’s production increases the well-being of others but the firm is not compensated by those others.
Positive consumption externality: When an individual’s consumption increases the well-being of others, but the individual is not compensated by those others.
Positive Externalities
5.1
Economics of Positive Production Externalities
There is underproduction of Q2 – Q1, with an associated deadweight loss of area ABC.
5.2
Externalities undermine efficiency because one party does not pay the costs or get all the (net) benefits of its actions.
The solution to this is, therefore, to internalize the externality.
Internalizing the externality: When either private negotiations or government action lead the party to fully reflect the external costs or benefits of that party’s actions.
The fishermen could pay the steel producer to reduce production.
Private-Sector Solutions to Negative Externalities: The Solution
5.1
One confusing aspect of the graphical analysis of externalities is knowing which curve to shift, and in which direction. There are four possibilities:
Negative production externality: SMC curve lies above PMC curve.
Positive production externality: SMC curve lies below PMC curve.
Negative consumption externality: SMB curve lies below PMB curve.
Positive consumption externality: SMB curve lies above PMB curve.
Armed with these facts, the key is to assess which category a particular example fits into.
Quick Hint
5.2
The Coase theorem says that private parties will be able to solve the problem of externalities. This is accomplished by internalizing the externality.
Coase theorem (Part I): When there are well-defined property rights and costless bargaining, then negotiations between the party creating the externality and the party affected by the externality can bring about the socially optimal market quantity.
Coase theorem (Part II): The efficient solution to an externality does not depend on which party is assigned the property rights, as long as someone is assigned those rights.
The Solution: The Coase Theorem
5.2
The Solution: Coasian Payments
The charge internalizes the externality and removes the inefficiency of the negative externality.
5.2
There are difficulties with Coasian solutions, making them less likely to arise as more people become involved.
The assignment problem: The first problem is assigning blame. Does the fisher pay the steel plant for not polluting Or does the steel plant pay for polluting
The holdout problem: Shared ownership of property rights gives each owner power over all the others. Each person has veto power and so may demand enormous payments.
The Problems with Coasian Solutions
5.2
The free rider problem: When an investment has a personal cost but a common benefit, individuals will underinvest. Individuals may not want to pay enough to reduce pollution.
Transaction costs and negotiating problems: It is hard to negotiate when there are large numbers of individuals on one or both sides of the negotiation.
This problem is amplified for an externality such as global warming, where the potentially divergent interests of billions of parties on one side must be somehow aggregated for a negotiation.
The Problems with Coasian Solutions
5.2
Ronald Coase’s insight that externalities can sometimes be internalized was a brilliant one.
It provides the competitive market model with a defense against the onslaught of market failures.
It is also an excellent reason to suspect that the market may be able to internalize some small-scale, localized externalities.
It won’t help with large-scale, global externalities.
Bottom Line
5.3
Public policy makers employ three types of remedies to resolve the problems associated with negative externalities:
Corrective taxation to discourage use
Subsidies to encourage use
Regulation to directly change use
Public-Sector Remedies for Externalities
5.3
Taxes and subsidies change the private marginal cost or marginal benefit without affecting the social marginal cost or benefit.
They can therefore be used to internalize the externality.
Taxes that correct externalities are called “Pigouvian taxation,” after A.C. Pigou.
Corrective Taxation and Subsidies
5.3
Corrective Taxation
This tax internalizes the externality and removes the inefficiency of the negative externality.
5.3
Corrective Subsidies
The quantity produced rises from Q1 to Q2, the socially optimal level of production.
5.3
In an ideal world, Pigouvian taxation and regulation would be identical.
Regulation has been the traditional choice for addressing environmental externalities in the United States and around the world.
In practice, there are complications that may make taxes a more effective means of addressing externalities.
Regulation
5.4
Distinctions Between Price and Quantity Approaches to Addressing Externalities: Basic Model
The optimal level of pollution reduction is R*, the point at which these curves intersect. Because pollution is the complement of reduction, the optimal amount of pollution is P*.
5.4
Price Regulation (Taxes) vs. Quantity Regulation in This Model
How do price regulation (taxes) and quantity regulation differ
Quantity regulation ignores the fact that the plants have different marginal costs of pollution reduction.
Pigouvian taxes cause efficient production by raising the cost of the input by the size of its external damage, thereby raising private marginal costs to social marginal costs.
Taxes are preferred to quantity regulation, with an equal distribution of reductions across the plants, because taxes give plants more flexibility in choosing their optimal amount of reduction, allowing them to choose the efficient level.
5.4
Price Regulation (Taxes) vs. Quantity Regulation in This Model
The efficient solution is for SMB = SMC, and SMC = PMC.
Finding efficient quantity requires knowing the whole SMC curve.
If price (tax) = MD, then firms will pollute until SMC = PMC—setting price requires only knowing MD.
But if marginal damage were unknown or not constant, setting tax would also be hard.
5.4
Multiple Plants with Different Reduction Costs
In conclusion,
The main benefit of taxation over regulation arises when plants differ in their cost of reducing pollution.
How to determine how much each plant should produce
Regulation often requires each plant to reduce usage by the same amount, but it would be more efficient to have the low-cost plants reduce use by more.
Pigouvian corrective taxes set equal to the marginal damage are more efficient.
5.4
Multiple Plants with Different Reduction Costs
The efficient solution is one where, for each plant, the marginal cost of reducing pollution is set equal to the social marginal benefit of that reduction; that is, where each plant’s marginal cost curve intersects with the marginal benefit curve.
5.4
Three possible policies here are:
Quantity regulation: For each plant, the marginal cost of reducing pollution is set equal to the social marginal benefit of that reduction.
Corrective tax: Pigouvian taxes cause efficient production by raising the cost of the input by the size of its external damage.
Quantity regulation with tradable permits: Trading allows the market to incorporate differences in the cost of pollution reduction across firms.
Multiple Plants with Different Reduction Costs
5.4
Uncertainty About Costs of Reduction
How does uncertainty about costs of reduction affect corrective strategies
If costs are high, then regulation could be expensive since plants are forced to comply.
Using a price mechanism avoids this problem since firms will adjust until cost of adjustment = tax.
But if costs are uncertain, then so is the amount of pollution reduction that a tax achieves.
Uncertainty About Costs of Reduction:
Case 1: Flat MD Curve (Global Warming)
5.4
Cost of pollution reduction ($)
MC1
MC2
MD = SMB
DWL1
DWL2
A
B
C
D
E
C1
t = C2
0
Reduction
Pollution
Pfull
Rfull
0
Mandated
P3
P2
P1
R3
R2
R1
If costs are uncertain, then taxation at level t = C2 leads to a much lower deadweight loss (DBE) than does regulation of R1 (ABC).
5.4
Uncertainty About Costs of Reduction:
Case 2: Steep MD Curve (Nuclear leakage)
If costs are uncertain, then taxation leads to a much larger deadweight loss (DBE) than does regulation (ABC).
5.4
Using taxes leads to lower costs…
… but less control over the amount of pollution reduction.
The instrument choice depends on whether the government wants to get the amount of pollution reduction right or whether it wants to minimize costs.
Uncertainty About Costs of Reduction:
Implications for Instrument Choice
5.5
Externalities arise when one party’s actions affect another party, and the first party doesn’t fully compensate the other for this effect.
Externalities are the classic answer to the “when” question of public finance: if externalities are present, then the market has failed and intervention is potentially justified.
Conclusion
This naturally leads to the “how” question of public finance. Two solutions:
Price-based measures (taxes and subsidies)
Quantity-based measures (regulation)
Which of these methods will lead to the most efficient regulatory outcome depends on factors such as the heterogeneity of the firms being regulated, the flexibility embedded in quantity regulation, and the uncertainty over the costs of externality reduction.
5.5
Conclusion

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