market failure. all pollution should be eliminated. 12345 a) strongly agree b) agree c) neutral d)...
TRANSCRIPT
Market Failure
All pollution should be eliminated.
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a) b) c) d) e)
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a) Strongly Agreeb) Agreec) Neutrald) Disagreee) Strongly Disagree
a) Strongly Agreeb) Agreec) Neutrald) Disagreee) Strongly Disagree
Market Failure When the market does not efficiently
allocate resources Either too much or too little is produced
Monopoly Externalities Public goods
Justification for government
intervention?
Justification for government
intervention?
Externalities Occur when decision makers do not consider all
costs (or benefits) of their actions
Two views
A. C. Pigou Ronald Coase
“Spillover effects”
Pigouvian ApproachSocial Cost = Private Cost + External Cost
Drinking Alcohol
Price of beerHangover
Damage to othersBoorish behavior
Cashmere Externalities
Pollution
Free Market: P1, Q1
Optimal Outcome: P2, Q2
steel
$
D1
Sprivate
Q1
P1
P2
Q2
Ssocial
External cost
How can society achieve social optimum?
Impose tax = marginal external cost
Free market overproduces goodsthat generate a negative externality
Internalize the externality!
“Pigou tax”
The efficient output will be less than the free market output when:
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a) b) c) d)
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a) Marginal social cost and marginal private cost are equal
b) Marginal social cost is greater than marginal private cost
c) Marginal social benefit and marginal private benefit are equal
d) Marginal social benefit is greater than marginal private benefit
a) Marginal social cost and marginal private cost are equal
b) Marginal social cost is greater than marginal private cost
c) Marginal social benefit and marginal private benefit are equal
d) Marginal social benefit is greater than marginal private benefit
Education
Free Market: P1, Q1
Optimal Outcome: P2, Q2
Years ofCollege
$
Dprivate
S1
Q1
P1
P2
Q2
Dsocial
External benefit
How can society achieve social optimum?
Provide subsidy = marginal external benefit
Free market underproduces goodsthat generate a positive externality
If there is a positive externality, the:
soci
al b
enef
its w
...
ext
erna
l ben
efit.
..
soci
al b
enef
its w
i..
priv
ate
benef
its w
i..
0% 0%0%0%
a) social benefits will be greater than the private benefits
b) external benefits will be greater than the social benefits
c) social benefits will be equal to the private benefits
d) private benefits will be greater than the social benefits
a) social benefits will be greater than the private benefits
b) external benefits will be greater than the social benefits
c) social benefits will be equal to the private benefits
d) private benefits will be greater than the social benefits
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a) greater; greater. b) greater; less. c) less; less. d) less; greater.
a) greater; greater. b) greater; less. c) less; less. d) less; greater.
A consequence of a negative consumption externality is that social benefits are ______ than private benefits, and the socially optimal level of output is ______ than the private level of output.
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Pollution Worksheet Optimal pollution for Marietta-Parkersburg
area is 60,000 units of emissions Abatement Cost
Cars: $5 Utilities: $10 Factories: $20
Controlling pollution through: Standards Taxes Tradable Permits
Standards
SOURCE EMISSIONS EMISSIONSABATED
ABATEMENTCOSTS
CARS
UTILITIES
FACTORIES
TOTAL
Set a maximum emissions of 20,000 units per source:
20,000
20,000
20,000
60,000
0
10,000
20,000
30,000
0
$100,000
$400,000
$500,000
“Command-and-Control” approach Emission standards Technology standards
Standards
SOURCE EMISSIONS EMISSIONSABATED
ABATEMENTCOSTS
CARS
UTILITIES
FACTORIES
TOTAL
Require each source to cut emissions by 10,000 units:
10,000
20,000
30,000
60,000
10,000
10,000
10,000
30,000
$50,000
$100,000
$200,000
$350,000
SOURCE EMISSIONS EMISSIONSABATED
ABATEMENTCOSTS
CARS
UTILITIES
FACTORIES
TOTAL
Require each source to cut emissions by 1/3:
$ 33,335
$100,000
$266,660
$399,995
13,333
20,000
26,667
60,000
6,667
10,000
13,333
30,000
Standards
SOURCE EMISSIONS EMISSIONSABATED
ABATEMENTCOSTS
CARS
UTILITIES
FACTORIES
TOTAL
Cost minimizing strategy of reducing emissions by 30,000 units.
0
20,000
40,000
60,000
20,000
10,000
0
30,000
$100,000
$100,000
0
$200,000
“$200,000 Solution”
Standards
Taxes
SOURCE EMISSIONS EMISSIONSABATED
ABATEMENTCOSTS
TAX COSTS
CARS
UTILITIES
FACTORIES
TOTAL
0
30,000
40,000
70,000
20,000
0
0
20,000
$100,000
0
0
$100,000
A tax of t = $6 per unit of pollution is imposed:
$180,000
$240,000
$420,000
0
SOURCE EMISSIONS EMISSIONSABATED
ABATEMENTCOSTS
TAX COSTS
CARS
UTILITIES
FACTORIES
TOTAL
0
0
40,000
40,000
20,000
30,000
0
50,000
$100,000
$300,000
0
$400,000
A tax of t = $11 per unit of pollution is imposed:
0
$440,000
$440,000
0
Taxes
SOURCE EMISSIONS EMISSIONSABATED
ABATEMENTCOSTS
TAX COSTS
CARS
UTILITIES
FACTORIES
TOTAL
20,000
30,000
40,000
90,000
0
0
0
0
0
0
0
0
A tax of t = $10.05 per unit of pollution is imposed only on factoriesfor each unit of pollution over the 60,000 limit, regardless of the source.
0
$301,500
$301,500
0
If transactions costs low enough, then $200,000 solution can be achieved through private bargaining.
Taxes
Cap and Trade Program
permits
$
$20
$10
$5
40 70 90
F
U
C
D
S
60
Abatement Cost
2008 Spot Auction
2008 7-yr Advance Auction
P = $10Q = 60,000
“$200,000 Solution”
Coasian Approach Externalities are due to incomplete
property rights assignment
Externalities are due to incomplete property rights assignment
“It takes two to tango”
Aunt Linda and the Nudist
Rifle River
Aunt Linda Nudist
Judge rules in favor of Aunt Linda
Judge rules in favor of Nudist
Fence comes down
Fence comes down(Linda pays Nudist)
2 rulings
$1500 $1000$1200
Coasian Approach
Coase TheoremIf property rights are well-defined and transactions costsare low enough, then private bargaining can result in anefficient allocation of resources.
CorollaryAllocation of resources does not depend on initial assignment of property rights.
Externalities are due to incomplete assignment of property rights
Externalities are due to incomplete assignment of property rights
Pollution Revisited
Cheshire, Ohio v. AEP
AEP paid $20 million to buy the 221-resident town in 2002
A factory's production process creates sludge that pours into a river. This sludge makes it difficult to fish in the river, increasing the costs of the local fishermen by $5000. The factory can install a water filter system for $4100, and the fishermen can utilize a weighted fishing net system (to get under the sludge) for $3250. Both systems would remedy the sludge damage to the fishermen.
Factory Filter: $4100Nets: $3250
Damage: $5000
a) Transactions costs low and factory is not liable for damage?
b) Transactions costs low and factory is liable for damage?
c) Transactions costs high and factory is liable for damage?
Characteristics of Goods Excludability: can you be excluded from consuming the good?
Rivalry: does my consumption hinder your consumption?
Rival Non-rival
Excludable
Non-Excludable
Private Goods Artificially ScarceGoods
Common Resources
Public Goods
Government Provided Goods and Services
Schools Roads Police Courts Fire Department Water Library Health Care Transportation
Schools Roads Police Courts Fire Department Water Library Health Care Transportation
National Defense Social Security Medicare Postal Service FBI, CIA, SEC, FTC,
FCC, NSF, FDA, ARC, FDIC, NLRB, HUD
National Defense Social Security Medicare Postal Service FBI, CIA, SEC, FTC,
FCC, NSF, FDA, ARC, FDIC, NLRB, HUD
National Defense Federal Government spent $670 billion in 2007
233,2$000,000,300
000,000,000,670$
How do we pay for this?
National Defense Telethon?
Taxes!
Per capita expenditure
Public Goods Problems
“free-rider” problem Under-provision by free market
Social Optimum requires: MSB = MSC Must find some way to aggregate individual marginal
benefits
Problems “free-rider” problem Under-provision by free market
Social Optimum requires: MSB = MSC Must find some way to aggregate individual marginal
benefits
Fireworks in Marietta
Quantity Julia’s MB
Seita’s MB
Leah’s MB
ΣMB MC Total Benefit
Total Cost
Net Benefits
10 $8 $5 $9 $22 $10 $22 $10 $12
20 $7 $4 $8 $19 $10 $41 $20 $21
30 $6 $3 $6 $15 $10 $56 $30 $26
40 $5 $2 $4 $11 $10 $67 $40 $27
50 $4 $1 $2 $7 $10 $74 $50 $24
60 $3 $0 $1 $4 $10 $78 $60 $18
The table below shows the marginal benefit from submarines for the only two citizens of a country. Submarines are a public good. If submarines cost $175 a piece to produce, what is the efficient quantity of submarines?
Kathy Bobby
Marginal benefit (dollars per sub)
Quantity
Marginal benefit (dollars per sub)
100 1 150
75 2 100
50 3 50
25 4 10
0 5 0
1 2 3 4 5
0% 0% 0%0%0%0%
a) 0b) 1c) 2d) 3e) 4f) 5
Common Resources
Non-excludable Rival in consumption
Examples Elephants in Africa Fish in the sea Bison in America
* overuse
* congestion
CITES
Campfire
“Tragedy of the commons”
Artificially Scarce Goods
Excludable Non-Rival
Examples Software Pay-per-view movies pharmaceuticals
Marginal Cost of provision is zero
DMC
MR
Q1
P1
Q0
Drugs
$