chapter 28 presentation 2. government intervention in externalities 1. lawsuits- pay damages to the...
TRANSCRIPT
Chapter 28Presentation 2
Government Intervention in Externalities•1. Lawsuits- pay damages to the injured
party or the fear of litigation persuades firms not to pollute
•2. Direct Controls- legislation limiting an activity (fines/imprisonment)
•3. Specific Taxes- levy taxes on causes of negative externalities (ie CFCs)
Subsidy
•A payment of funds (or goods/services) by a government, firm, or household for which it receives no goods/service in return
Government and Positive Externalities •***correcting for under-allocation•1. Subsidies to Buyers- ex discounts for
mothers to get babies vaccinated•2. Subsidies to Producers- $$ given to
doctors or clinics for giving vaccines•3. Government Provisions- provide the
product as a public good (ex Polio Vaccine)
Tragedy of the Commons
•The tendency for commonly owned natural resources to be overused, neglected, or degraded because the common ownership gives nobody an incentive to maintain or improve them
•EX- air, rivers, lakes, street pollution•-dumping toxic wastes instead of proper
disposal
Fallacy of Consumption
•Each firm/individual thinks that their individual contribution to pollution is so small that it is of little or no consequence
•However, multiplied hundreds or thousands of times, this leads to mass pollution
Market for Externality Rights (Cap and Trade)•A market in which firms can buy rights to
discharge pollutants. The price of such rights is determined by the demand for the right to discharge pollutants and a perfectly inelastic supply
•**a pollution control agency determines the amount of pollutants that water/air can safely absorb
Market For Externalities
D2006
D2016S=Supply of
PollutionRights
500 750 1000
$100
$200
P
0 Q
Pri
ce P
er
Poll
uti
on
Rig
ht
Quantity of 1-Ton Pollution Rights
Benefits of Market for Externalities•Monetary reason for firms not to pollute•Conservation groups can buy pollution
rights and not use them•Revenue can be used to fund pollution
control•Increasing costs give incentive for firms
to invest in emissions controls
Asymmetric Information
•A situation where one party to a market transaction has much more information about a product or service than the other
•Buyers and sellers do not have the same information about price, quality or other aspects of a good/service
Moral Hazard Problem
•The possibility that individuals or institutions will change their behavior as the result of a contract or agreement
•Ex- a bank whose deposits are insured against loss may make riskier loans and investments
•-guaranteed contracts for pro athletes•-careless drivers due to insurance
Adverse Selection Problem
•A problem arising when information known to one party to a contract or agreement is not known to the other party, causing the unknowing party to suffer major losses
•EX- the sickest individuals buy the most medical insurance