© 2008 Pearson Addison Wesley. All rights reserved Chapter Seventeen Externalities, Open Access, and Public Goods

© 2008 Pearson Addison Wesley. All rights reserved

Chapter Seventeen

Externalities, Open Access, and Public

Goods

© 2008 Pearson Addison Wesley. All rights reserved. 17-2

Externalities, Open Access, and Public Goods

• In this chapter, we examine seven main topics

– Externalities– The Inefficiency of Competition with Externalities

– Regulating Externalities– Market Structure and Externalities– Allocating Property Rights to Reduce Externalities

– Open-Access Common Property– Public Goods


Externalities

• Externality– The direct effect of the actions of a person or firm on another person’s well-being or a firm’s production capability rather than an indirect effect through changes in prices.


Externalities

• Externalities may either help or harm others. • An externality that harms someone is called

a negative externality.• A positive externality benefits others.

雞糞滋生蒼蠅　臭味沖天惹民怨

• 南投有雞舍養了 10 萬隻雞，業者收集雞糞卻不注意衛生問題，任由蒼蠅滋生，雞糞的臭味沖天，只要風一吹，附近村落全都聞到臭味；更讓附近居民氣憤的是，雞舍主人在空地隨便挖個大洞，就把垃圾、雞屎、污水倒進去，由於雞舍位處水源上游，因此在下游的民眾擔心，他們喝到的都是雞屎臭水。

資料來源： http://tw.news.yahoo.com/article/url/d/a/090516/8/1jm4w.html

更新日期 :2009/05/16 17:35 黃茂松 (TVBS)

景氣差攤販增加影響通行權益

• … 第一市場管委會表示，近年來流動攤販愈來愈多，但很少聽到店家抱怨搶生意，反而是民眾經常投訴道路堵塞…公家機關關切攤販是否因盤據道路騎樓，影響交通安全或民眾的通行權益。…潭子鄉長簡文祥指出，要解決流動攤販衍生的問題，沒有兩全其美的辦法，鄉公所雖可轉請警察取締，但取締不是要逼流動攤販無法生存，而是退到不妨害交通的適當地點營業…

資料來源：http://tw.news.yahoo.com/article/url/d/a/090511/78/1j9q4.html

更新日期： 2009/05/11 04:09 截錄自：自由時報


The Inefficiency of Competition with Externalities

• Competitive firms and consumers do not have to pay for the harms of their negative externalities, so they create excessive amounts.

• Because producers are not compensated for the benefits of a positive externality, too little of such externalities is produced.


The Inefficiency of Competition with Externalities

• Private cost– The cost of production only, not including externalities

• Social cost– The private cost plus the cost of the harms from externalities


Supply-and-Demand Analysis

• We use a supply-and-demand diagram to illustrate that a competitive market produces excessive pollution because the firms’ private cost is less than their social cost.


Figure 17.1 Welfare Effects of Pollution in a Competitive Market

• The competitive equilibrium, , is determined by the intersection of the demand curve and the competitive supply or private marginal cost curve, , which ignores the cost of pollution.

pMC

ce


Figure 17.1 Welfare Effects of Pollution in a Competitive Market

• The social optimum, , is at the intersection of the demand curve and the social marginal cost curve, , where is the marginal cost of the pollution (gunk). Private producer surplus is based on curve, and social producer surplus is based on the curve.sMC

se

gMC s p gMC MC MC


Figure 17.1Welfare Effects of Pollution in a Competitive Market


Supply-and-Demand Analysis

• The figure illustrates two main results with respect to negative externalities.

• First, a competitive market produces excessive negative externalities.

• Second, the optimal amount of pollution is greater than zero.


Cost-Benefit Analysis

• By using a cost-benefit analysis, we obtain another interpretation of the pollution problem in terms of the marginal cost and benefit of the pollution itself.

• Welfare is maximized by reducing output and pollution until the marginal benefit from less pollution equals the marginal cost of less output.


Figure 17.2 Cost-Benefit Analysis of Pollution

a) The benefit curve reflects the reduction in harm from pollution as the amount of gunk falls from the competitive level. The cost of reducing the amount of gunk is the fall in output, which reduces consumer surplus and private producer surplus. Welfare is maximized at 84 tons of paper and 84 units of gunk, the quantities at which the difference between the benefit and cost curves, the net benefit, is greatest.


Figure 17.2(a)Cost-Benefit Analysis of Pollution


Figure 17.2 Cost-Benefit Analysis of Pollution

b) The net benefit is maximized where the marginal benefit, , which is the slope of the benefit curve, equals the marginal cost, , the slope of the cost curve.MC

MB


Figure 17.2(b)Cost-Benefit Analysis of Pollution


Regulating Externalities

• Because competitive markets produce too many negative externalities, government intervention may provide a social gain.


Table 17.1Industrial CO2 Emissions, 2003



• If a government has sufficient knowledge about pollution damage, the demand curve, costs, and the production technology, it can force a competitive market to produce the social optimum.



• A governmental limit on the amount of air or water pollution that may be released is called an emission standard. A tax on air pollution is called an emissions fee, and a tax on discharges into the air or waterways is an effluent charge.



• Internalize the externality– To bear the cost of the harm that one inflicts on others (or to capture the benefit that one provides to others)


Figure 17.3 Taxes to Control Pollution

• Placing a tax on the firms equal to the harm the gunk, , causes them to internalize the externality, so their private marginal cost is the same as the social marginal cost, . As a result, the competitive after-tax equilibrium is the same as the social optimum, . se

( ) gt Q MC

sMC


Figure 17.3Taxes to Control Pollution


Figure 17.3 Taxes to Control Pollution

• Alternatively, applying a specific tax of

per ton of paper, which is the marginal harm from the gunk at , also results in the social optimum.

84sQ$84

Emissions Fees versus Standards under Uncertanity

• We have seen that the government can induce a firm to produce efficiently if it sets either a fee or a standard optimally.

• Although either regulation would be optimal in a world of certainty, these regulations are not optimal if the actual marginal cost curve is higher or lower than the expected curve.



Figure 17.4Fees Versus Standards Under Uncertainty


Market Structure and Externalities

• Two of our main results concerning competitive markets and negative externalities—that too much pollution is produced and that a tax equal to the marginal social cost of the externality solves the problem—do not hold for other market structures.


Monopoly and Externalities

• Although the competitive market with an externality always produces more output than the social optimum, a monopoly may produce more than, the same as, or less than the social optimum.


Monopoly and Externalities

• Which effect dominates depends on the elasticity of demand for the output and on the extent of the marginal damage the pollution causes.


Monopoly Versus Competitive Welfare with Externalities

• In the absence of externalities, welfare is greater under competition than under an unregulated monopoly.

• However, with an externality, welfare may be greater with monopoly than with competition.


Figure 17.5 Monopoly, Competition, and Social Optimum with Pollution

• At the competitive equilibrium, , more is produced than at the social optimum, . As a result, the deadweight loss in the competitive market is . The monopoly equilibrium, , is determined by the intersection of the marginal revenue and the private marginal cost, , curves.

D

ce

me

se

pMC


Figure 17.5 Monopoly, Competition, and Social Optimum with Pollution

• The social welfare (based on the marginal social cost, , curve) under monopoly is . Here the deadweight loss of monopoly, , is less than the deadweight loss under competition, . D

CA B

sMC


Figure 17.5Monopoly, Competition, and Social Optimum with Pollution


Taxing Externalities in Noncompetitive Markets

• Trying to solve a negative externality problem is more complex in a noncompetitive market than in a competitive market.


Taxing Externalities in Noncompetitive Markets

• To achieve a social optimum in a competitive market, the government only has to reduce the externality, possibly by decreasing output.

• In a noncompetitive market, the government must eliminate problems arising from both externalities and the exercise of market power.


Allocating Property Rights to Reduce Externalities

• Instead of controlling externalities directly through emissions fees and emissions standards, the government may take an indirect approach by assigning a property right: an exclusive privilege to use an asset.

• If no one holds a property right for a good or a bad, the good or bad is unlikely to have a price.


Allocating Property Rights to Reduce Externalities

• For many bads, such as pollution, and for some goods, property rights are not clearly defined. No one has exclusive property rights to the air we breathe. Because of this lack of a price, a polluter’s private marginal cost of production is less than the full social marginal cost.


Coase Theorem

• According to the Coase Theorem (Coase, 1960), the optimal levels of pollution and output can result from bargaining between polluters and their victims if property rights are clearly defined.


Table 17.2(a)Property Rights and Bargaining


Table 17.2(b)Property Rights and Bargaining


Table 17.2(c)Property Rights and Bargaining


Coase Theorem

If there are no impediments to bargaining, assigning property rights results in the efficient outcome at which joint profits are maximized.

Efficiency is achieved regardless of who receives the property rights.


Coase Theorem

Who gets the property rights affects the income distribution. The property rights are valuable. The party with the property rights may be compensated by the other party.


Problems with the Coase Approach

• First, if transaction costs are very high, it might not pay for the two sides to meet.

• Second, if firms engage in strategic bargaining behavior, an agreement may not be reached.

• Third, if either side lacks information about the costs or benefits or reducing pollution, a nonefficient outcome may occur.


Markets for Pollution

• If high transaction costs preclude bargaining, we may be able to overcome this problem by using a market, which facilitates exchanges between individuals.

• Under this cap and trade system, the government gives firms permits, each of which confers the right to create a certain amount of pollution. Each firm may use its permits or sell them to other firms.


Markets for Pollution

• By using a market, the government does not have to collect this type of detailed information to achieve efficiency. Its only decision concerns what total amount of pollution to allow.


Open-Access Common Property

• Open-Access Common Property– Resources to which everyone has free access


Overuse of Open-Access Common Property

• Because people do not have to pay to use open-access common property resources, they are overused.

e.g.

1. Common Pools.2. The Internet.3. Roads4. Fisheries.


Solving the Commons Problem

• Government Regulation of Commons– Overuse of a common resource occurs because individuals do not bear the full social cost. However, by applying a tax or fee equal to the externality harm that each individual imposes on others, a government forces each person to internalize the externality.



• Government Regulation of Commons– Alternatively, the government can restrict access to the commons. One typical approach is to grant access on a first-come, first-served basis.



• Assigning Property Rights– An alternative approach to resolving the commons problem is to assign private property rights.


Public Goods

• Public Good– A commodity or service whose consumption by one person does not preclude others from also consuming it


Table 17.3Rivalry and Exclusion


• Markets for public goods exist only if nonpurchasers can be excluded from consuming them.

• Markets do not exist for nonexclusive public goods.

• If the government does not provide a nonexclusive public good, no one provides it.

Markets for Public Goods


Demand for Public Goods

• Because a public good lacks rivalry, many people can get pleasure from the same unit of output. As a consequence, the social demand curve or willingness-to-pay curve for a public good is the vertical sum of the demand curves of each individual.


Figure 17.6 Inadequate Provision of a Public Good

• Security guards protect both tenants of the mall. If each guard costs $10 per hour, the television store, with demand , is willing to hire four guards per hour. The ice-cream parlor, with demand , is not willing to hire any guards.

2D

1D


Figure 17.6 Inadequate Provision of a Public Good

• Thus if everyone acts independently, the equilibrium is . The social demand for this public good is the vertical sum of the individual demand curves, . Thus the social optimum is , at which five guards are hired.

D

pe

se


Figure 17.6Inadequate Provision of a Public Good


Equation 17.1


Equation 17.2


Equation 17.3


Equation 17.4


Equation 17.5


Free Riding

• Many people are unwilling to pay for their share of a public good. They try to get others to pay for it, so they can free ride: benefit from the actions of others without paying.


Table 17.4Private Payments for a Public Good


Free Riding

• In each of these games, the Nash equilibrium is for neither store to hire a guard because of free riding. The nonoptimal outcome occurs for the same reason as in other prisoners’ dilemma games: The stores don’t do what is best for them collectively when they act independently.


Reducing Free Riding

• Governmental or other collective actions can reduce free riding.

• Methods that may be used include social pressure, merges, compulsion, and privatization.


Valuing Public Goods

• To ensure that a nonexclusive public good is provided, a government usually produces it or compels others to do so. Issues that a government faces in providing such a public good include whether to provide it at all and, if so, how much to provide.


Table 17.5Voting on $300 Traffic Signals


Valuing Public Goods

• The problem with yes-no votes is that they ignore the intensity of preferences.

• Thus such majority voting fails to value the public good fully and hence does not guarantee that it is efficiently provided.

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© 2008 Pearson Addison Wesley. All rights reserved Chapter Seventeen Externalities, Open Access, and Public Goods