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(共23张PPT)
EXTERNALITIES
Chapter 5
Externalities
Externality – An activity of one entity that affects the welfare of another entity in a way that is outside the market mechanism
A paper mill’s production of the carcinogen dioxin increases society’s health care costs; these costs to society are not included in the paper mill’s paper price
However, when large numbers of suburbanites relocate to a city, society is affected, although the effect is captured through higher prices of city housing
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
The Nature of Externalities
Privately-owned monly-owned resources
A privately owned resource: its price reflects its value so used efficiently (MSC=MSB)
A commonly-owned resource (air, oceans): price ($0) does not reflect its value so used inefficiently (MSC>MSB)
Externalities can be produced by consumers & firms
Externalities are reciprocal in nature
Externalities can be positive or negative
Public goods can be viewed as a special kind of externality
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
The Nature of Externalities-Graphical Analysis
Q per year
$
MB
0
MD
MPC
MSC = MPC + MD
Q1
Q*
Actual output
Socially efficient output
a
b
c
d
f
e
g
h
Reduction from Q1 to Q* means dcg profit loss for Supplier and dchg welfare gain for Demander.
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
What Pollutants Do Harm
Empirical Research on Pollution Effects on Health
Difficult to measure because of inability to perform randomized studies on pollution effects
Must rely on cross-sectional or time-series analysis
Studies unable to measure lifetime exposure to air pollution
Once pollutant identified:
Must identify the activities that produce the pollutant
Must identify the value of the damage done
Must identify the costs of remedying the damage
Empirical Evidence: The Effect of Air Pollution on Housing Values
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
Private Responses
Bargaining and the Coase Theorem
Q per year
$
MB
0
MD
MPC
MSC = MPC + MD
Q1
Q*
c
d
g
h
Supplier will ↓ Q1 to Q* if paid by Demander, who is willing to do so. Bargain possible over $ transferred.
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
The Coase Theorem
Coase Theorem – Given:
Low transaction costs
Clear assignment of property rights
An efficient solution to an externality problem can be achieved
Assumptions necessary for Coase Theorem to work
The costs to the parties of bargaining are low
The owners of resources can identify the source of damages to their property and legally prevent damages
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
Other Private Solutions
Mergers – way to internalize the externality
The externality transmitter and recipient become one company.
Social conventions/Morals
For example: “Littering” is wrong.
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
Public Responses to Externalities - Taxes
Q per year
$
MB
0
MD
MPC
MSC = MPC + MD
Q1
Q*
c
d
(MPC + cd)
Pigouvian tax revenues
i
j
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
Public Responses to Externalities – Subsidies that pay polluter not to pollute
Q per year
$
MB
0
MD
MPC
MSC = MPC + MD
Q1
Q*
c
d
(MPC + cd)
i
j
g
k
h
f
e
Pigouvian subsidy
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
Public Responses to Externalities- Emissions Fee: tax on each pollution unit
0
Pollution reduction
MSB
MC
e*
f*
$
Emissions fee
Emissions fee
f1
f1 results in only e1 reduction
f* results in e* reduction: the efficient level
e1
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
Public Responses to Externalities-
Uniform Pollution Reduction
Bart’s pollution reduction
Homer’s pollution reduction
50
75
90
50
75
90
MCB
MCH
25
10
b
Requiring each company to reduce pollution by 50 units is not cost effective. Better to have Bart reduce pollution by 100 units because he can do so at a lower cost. But is it fair
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
Emissions Fees achieve fairness and efficiency
Bart’s pollution reduction
Homer’s pollution reduction
50
75
90
50
75
90
MCB
MCH
25
f = $50
f = $50
Bart’s Tax Payment
Homer’s Tax Payment
An Emissions Fee=$50 means Bart will reduce by 75 and Homer only by 25, but Homer pays larger tax.
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
Public Responses to Externalities-
Cap-and-Trade: Polluters must have a permit
Bart’s pollution reduction
Homer’s pollution reduction
50
75
90
50
75
90
MCB
MCH
25
f = $50
f = $50
10
a
b
Bart: The cost of reducing pollution is less than market price of a permit, so sell permit.
Homer: The cost of reducing pollution is greater than market price of a permit so buy permit.
BOTH GAIN FROM TRADE
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
Emissions Fee v Cap-and-Trade
Responsiveness to Inflation
Responsiveness to Cost Changes
Distributional Effects
Responsiveness to Uncertainty of Costs of reducing pollution (cont on next slides)
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
Cap-and-Trade vs. Emissions Fee
Inelastic MSB of pollution reduction
0
Pollution reduction
MSB
MC*
e*
f*
$
MC’
ef
e’
Too much pollution reduction
Too little pollution reduction
Cap/trade allows too much pollution
Emissions Fee allows too little pollution
C&T more efficient than Emissions Fee
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
Cap-and-Trade v Emissions Fee
Elastic MSB of pollution reduction
0
Pollution reduction
MC*
e*
f*
$
MC’
ef
e’
MSB
Too much pollution reduction
Too little pollution reduction
Cap/trade allows too much pollution
Emissions Fee allows too little pollution
Emissions Fee more efficient than C&T
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
Command-and-Control Regulation
Command-and-control regulations require a given amount of pollution reduction with limited or no flexibility on how to achieve reduction
Technology requirements
Performance requirements
Is command-and-control ever better
Hot spots: Areas with relatively high concentrations of emissions
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
The U.S. Response
Clean Air Act
1970 amendments
Command-and-control in the 70s
How well did it work
Policy Perspective: Cap-and-Trade for Sulfur Dioxide
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
Implications for Income Distribution
Who Benefits
Low- or High-Income Individuals
Who Bears the Cost
Workers of firms who must reduce output
Buyers of firms’ output
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
Positive Externalities
Research per year
$
MPB
MC
MEB
MSB = MPB + MEB
R*
R1
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
Positive Externalities:
A Cautionary Note on Requests for Subsidies
Subsidies must come from taxpayers
Market does not always fail: the fact that an activity is beneficial does not always mean that a subsidy is required for efficiency
Policy Perspective: Owner-Occupied Housing
2014 by McGraw-Hill Education. All Rights Reserved.
5-*
Chapter 5 Summary
Externalities occurs when the activity of one person or firm positively or negatively affects another person/group/firm outside the market mechanism
An inefficient allocation of resources results because the market price does not reflect the external costs or benefits
The Coase Theorem indicates that private solutions through bargaining can achieve the efficient outcome under certain circumstances
Public solutions to externalities designed to achieve efficiency include taxes/subsidies; emissions fees; and command-and-control regulations
A market-based, cost-effective, public solution is cap-and-trade where pollution permits – the right to pollute – are traded
2014 by McGraw-Hill Education. All Rights Reserved.
5-*

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