consumption externalities production externalities · consumption externalities occurs when one...
TRANSCRIPT
![Page 1: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/1.jpg)
Externalities
Consumption Externalities
Production Externalities
![Page 2: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/2.jpg)
Consumption Externalities
Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production.Negative consumption externalities: smokers, automobile pollution.Positive consumption externality: neighbor’s flowers.
![Page 3: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/3.jpg)
Production Externalities
Production possibilities of one firm are influenced by choices of another firm or consumer.Negative production externality: fishery cares about pollutants dumped by upstream firm.Positive production externality: R&D of one firm has positive effects on R&D of other firms.
![Page 4: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/4.jpg)
Crucial Feature of Externalities
There are goods people care about that are not sold on markets: no market for automobile pollution, pollutants, etc.
Absence of markets implies equilibrium when there are externalities is inefficient: too much negative externalities, not enough positive ones.
![Page 5: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/5.jpg)
Example: Smoking
smoke
0
1
money
E
'E
![Page 6: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/6.jpg)
Example: Smoking
smoke
0
1
money
E
'E
'X
![Page 7: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/7.jpg)
Example: Smoking
smoke
0
1
money
E
'E
X
![Page 8: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/8.jpg)
Example: Smoking
At an efficient equilibrium we have:
),(),( smokemoneyMRSsmokemoneyMRS BA =
![Page 9: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/9.jpg)
Example: Smoking
Introducing a market for smoke improves the utility of both consumers.
Problem with setting up such market: poorly defined property rights.
![Page 10: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/10.jpg)
Example: Smoking
Q: If a market for smoke can be organized, how much smoke will be produced?
A: In general, it depends on the initial distribution of property rights.
![Page 11: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/11.jpg)
Example: Production Externalities
Firm S produces: 1. steel s;2. pollution x, which is dumped into a river.
Firm F, a fishery, is located downstream and is adversely affected by S’s pollution.
![Page 12: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/12.jpg)
Example: Production Externalities
Cost function for S:
Cost function for F:
++xfc f ,
( )++xscs ,
![Page 13: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/13.jpg)
Example: Production Externalities
Profit maximization for S:
Profit maximization for F:
( )xscsp ssxs,max
,−
( )xfcfp fff,max −
![Page 14: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/14.jpg)
Example: Production Externalities
Optimal choices for S:
( )
( )xxscsxscp
s
ss
∂∂=
∂∂=
,0
,
![Page 15: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/15.jpg)
Example: Production Externalities
Optimal choice for F:
( )fxfc
p ff ∂
∂=
,
![Page 16: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/16.jpg)
Example: Production Externalities
When setting optimal quantity of pollution, the steel firm does not take into account the cost of pollution for the fishery.
Social cost of steel production: increase in the cost of fishing associated with an increase in pollution.
![Page 17: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/17.jpg)
Example: Production Externalities
What does a Pareto efficient production plan for steel and fish look like?
Suppose the two firms merged:
( ) ( )xfcxscfpsp fsfsfxs,,max
,,−−+
![Page 18: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/18.jpg)
Example: Production Externalities
Optimal choice of f,s,x:( )
( )
( ) ( )xxsc
xxfcfxfc
p
sxscp
sf
ff
ss
∂∂−=
∂∂
∂∂
=
∂∂=
,,
,
,
![Page 19: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/19.jpg)
Example: Production Externalities
Compare pollution produced by merged firm pollution produced by steel firm:
( ) ( )
( ) 0,
0,,
**
********
=∂
∂−
>∂
∂=
∂∂−
xxsc
fxfc
xxsc
s
fs
![Page 20: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/20.jpg)
Example: Production Externalities
x
MCfMC
sMC−
sf MCMC −=
*x**x
![Page 21: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/21.jpg)
Example: Production Externalities
At the Pareto efficient level of production, the profits of the merged firm are larger than the sum of the profits of the two firms.
How can the Pareto efficient outcome be achieved?
![Page 22: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/22.jpg)
Internalizing Production Externalities: Taxation
Steel firm faces the wrong price for pollution, i.e., zero.
To correct this, impose a quantity tax t on pollutants:
( ) txxscsp ssxs−− ,max
,
![Page 23: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/23.jpg)
Internalizing Production Externalities: Taxation
Optimal choice of pollution with tax:
Optimal choice of t:
( ) txxscs =
∂∂− ,
( )xxfc
t f
∂∂
=****
* ,
![Page 24: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/24.jpg)
Internalizing Production Externalities: Create Market
Missing market.Create market by assigning fishery the right to clean water. Fishery can sell right to steel firm.Or, create market by assigning steel firm the right to pollute water. Steel firm can sell right to fishery.
![Page 25: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/25.jpg)
Internalizing Production Externalities: Create Market
The amount of pollution does not depend on how property rights are distributed (different from consumption externalities).
Distribution of property rights affects firms’ profits.
![Page 26: Consumption Externalities Production Externalities · Consumption Externalities Occurs when one consumer cares directly about another consumer’s consumption or a firm’s production](https://reader034.vdocuments.site/reader034/viewer/2022051321/5af7dab47f8b9a44658b9c0a/html5/thumbnails/26.jpg)
Production Externalities: Incentives Are Already There
Steel firm and fishery have an incentive to merge (higher profits): why don’t they merge?!
Or, somebody could buy both firms, merge them, and then enjoy higher profits.