ho5e-ch05---microeconomics

1、R. GLENNHUBBARD,ANTHONY PATRICKO’BRIEN,FIFTH EDITION,© 2015 Pearson Education, Inc.,Externalities, Environmental Policy, and Public Goods,What Is the “Best” Level of Pollution?,Is there a way to know what is the o

2、ptimal level of pollution for a society?“No pollution” may be good for the environment, but is probably not good for people—most modern conveniences in some way result in pollution.But unrestrained pollution is proba

3、bly not optimal either.Economics offers some ideas for how to decide on how much pollution to allow.,Externalities and Economic Efficiency,5.1,Identify examples of positive and negative externalities and use graphs to

4、show how externalities affect economic efficiency.,Pollution is an Externality,No one sets out to create pollution; pollution is an unintended by-product of various activities.Pollution would not be a problem if pollut

5、ion only affected the person who created it; people would create pollution only until its marginal cost equaled its marginal benefit.But pollution is an example of an externality: a benefit or cost that affects someone

6、 who is not directly involved in the production or consumption of a good or service.Think of an externality like a side-effect.,Electricity Production,Electricity production is an incredibly important industry for a mod

7、ern economy.Consider the market for electricity. It consists of:Sellers, who face increasing marginal costs to produce electricityBuyers, who face decreasing marginal benefits of additional electricityThe actions o

8、f these groups generate market supply and demand curves for electricity.,Cost of Electricity Production,When firms produce electricity, they have costs of production:BuildingsEquipmentFuelLabor, etc.Those firms mak

9、e their decisions about how much to produce based on these private costs.But the social cost is higher: the cost to society includes both the private cost and the external cost of the pollution.,Externalities in the El

10、ectricity Production Market,Supply curve S1 represents just the marginal private cost that the electricity producer has to pay. Supply curve S2 represents the marginal social cost, which includes the costs to those aff

11、ected by pollution.The optimal level of production for society is QEfficient; at this quantity, the marginal cost to society is just equal to the marginal benefit.,The effect of pollution on economic efficiency,Figure

12、5.1,Inefficiency Due to Negative Externalities,However the market equilibrium results from the decisions of producers, who see their cost of production given by S1.Price (PMarket) is “too low” and quantity (QMarket) is

13、“too high”: the cost to society of the additional electricity exceeds its benefit to society.Deadweight loss results.When there is a negative externality in producing a good or service, too much of the good or service

14、will be produced at market equilibrium.,The effect of pollution on economic efficiency,Figure 5.1,Externalities,Pollution is an example of a negative externality in production.Negative externalities might result from c

15、onsumption.Example: cigarette smokeExternalities might also be positive, with social benefits exceeding private benefits.Example: college educationPrivate benefit: the benefit received by the consumer of a good or

16、service.Social benefit: The total benefit from consuming a good or service including both the private benefit and any external benefit.Positive externalities result in underproduction relative to efficiency.,Externali

17、ties in the College Education Market,College educations have positive externalities.The marginal social benefit from a college education is greater than the marginal private benefit to college students. Because only th

18、e marginal private benefit is represented in the market demand curve D1, the quantity of college educations produced, QMarket, is too low.,The effect of a positive externality on economic efficiency,Figure 5.2,When there

19、 is a positive externality in consuming a good or service, too little of the good or service will be produced at market equilibrium.,Externalities and Market Failure,If there are negative or positive externalities, the m

20、arket equilibrium will not result in the efficient quantity being produced.There will be deadweight loss.This is an example of market failure: a situation in which the market fails to produce the efficient level of o

21、utput.The larger the externality, the greater is likely to be the size of the deadweight loss—the extent of the market failure.,What Causes Externalities?,Externalities arise because of incomplete property rights, or f

22、rom the difficulty of enforcing property rights in certain situations.Suppose a farmer and a paper mill share a stream.If no-one owns the stream, the paper mill will discharge waste into the stream, making it unusable

23、 for the farmer.If the farmer owns the stream, he canPrevent the mill from discharging into the stream, orAllow the mill to discharge for a fee, if that is beneficial to him.Either way, good property rights avoid th

24、e market failure.Property rights: The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.,Private Solutions to Externalities: The Coase Theorem,5.2,Discu

25、ss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality.,Is “Zero Pollution” Efficient?,The previous slide suggested that avoiding pollution altogether is t

26、he best solution.But what if the paper mill saves a lot of money by discharging into the stream, and the farmer has an alternative water supply?Much of the time, a non-zero amount of pollution is optimal, determined

27、by where the marginal benefit from pollution is just equal to the marginal cost of pollution.Or equivalently, the marginal cost of pollution reduction equals the marginal benefit from pollution reduction.,An Efficient A

28、mount of Pollution,This graph shows pollution reduction, which has both costs and benefits. 10 units of pollution reduction is “too much”; the cost of the last unit exceeds the benefit. 7 units of pollution reduction i

29、s “too little”; the benefit of the next unit exceeds the cost.8.5 units is efficient; the marginal cost just equals the marginal benefit.,The marginal benefit from pollution reduction should equal the marginal cost,Figu

30、re 5.3,The Net Benefit of Changing to the Efficient Level,Increasing the reduction in sulfur dioxide emissions from 7.0 million tons to 8.5 million tons results in total benefits equal to the sum of the areas A and B und

31、er the marginal benefits curve. The total cost of this decrease in pollution is equal to the area B under the marginal cost curve. The total benefits are greater than the total costs by an amount equal to the area of t

32、riangle A.,The benefits of reducing pollution to the optimal level are greater than the costs,Figure 5.4,Can Private Parties Achieve the Efficient Level?,In principle, private parties could achieve the efficient level of

33、 pollution.People feeling the cost of the additional pollution (A+B) could pay polluters an amount equal to B; then polluters would choose not to pollute.But if the benefits of pollution reduction are felt diffusely

34、(by many widespread people), achieving this outcome is difficult—we say the transaction costs are too high.,The benefits of reducing pollution to the optimal level are greater than the costs,Figure 5.4,The Coase Theorem,

35、Nobel laureate Ronald Coase argued that private parties could solve the externality problem through private bargaining, providedProperty rights are assigned and enforceable, andTransaction costs are low. Transaction

36、costs: The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.The Coase Theorem also requires that parties have full information about t

37、he costs and benefits involved.,The Coase Theorem and Property Rights,Perhaps Coase’s most important observation was that it did not matter to whom property rights were assigned.In the example of the paper mill and the

38、 farmer, we said that if the farmer had enforceable property rights over the stream, the externality problem could be resolved.But the same is true if the paper mill owns the stream!Can you explain why?,The Birds Appl

39、es and the Bees,There are mutual positive externalities in apple-growing and beekeeping.This suggests both will be underprovided.But apple-growers and beekeepers have developed private solutions to this:,Beekeepers a

40、long the West Coast rent their hives out to orchardists in “pollination contracts,” moving them to where they are needed at different times of the year.,Government Policies to Deal with Externalities,5.3,Analyze governme

41、nt policies to achieve economic efficiency in a market with an externality.,When Can Two Wrongs Make a Right?,In chapter 4, we learned that taxes caused inefficiency (deadweight loss) by moving the level of production aw

42、ay from the efficient level.In this chapter, externalities cause inefficiency for the same reason.A tax of just the right size could cause these two effects to cancel out, returning us to the efficient level of produ

43、ction.,Corrective Taxes for Negative Externalities,Utilities do not bear the cost of pollution, so they produce too much.If the government imposes a tax equal to the cost of the pollution, the utilities will internaliz

44、e the externality. The supply curve will shift up, from S1 to S2. The market equilibrium quantity falls to the economically efficient level.,When there is a negative externality, a tax can lead to the efficient level

45、 of output,Figure 5.5,Effect of the Corrective Taxes,The price of electricity will rise from PMarket, which does not include the cost of acid rain, to PEfficient, which does include the cost.Consumers pay the price PEf

46、ficient, while producers receive a price P, which is equal to PEfficient minus the amount of the tax.,When there is a negative externality, a tax can lead to the efficient level of output,Figure 5.5,Can Taxes “Solve” Pos

47、itive Externalities Too?,Taxes worked to solve the problem of negative externalities because:Negative externalities caused too much to be produced, whileTaxes reduced the amount of output.When there are positive exte

48、rnalities, too little will be produced.Taxes won’t work; but subsidies might.Subsidy: An amount paid to producers or consumers to encourage the production or consumption of a good.,Corrective Subsidies for Positive E

49、xternalities,Individuals make decisions about whether or not to “consume” a college education, with a resulting market price and quantity.But what if there are positive externalities to a college education?It is good

50、for us all if other people are smart and make good decisions.This is an argument for a subsidy in the market for college education.,When there is a positive externality, a subsidy can bring about the efficient level of

51、 output,Figure 5.6,Effect of the Corrective Subsidies,The subsidy will cause the demand curve to shift up, from D1 to D2. The market equilibrium quantity will shift from QMarket to QEfficient, the economically efficien

52、t equilibrium quantity. Producers receive the price PEfficient, while consumers pay a price P, which is equal to PEfficient minus the amount of the subsidy.,When there is a positive externality, a subsidy can bring abo

53、ut the efficient level of output,Figure 5.6,Corrective Taxes and Subsidies,The taxes and subsidies seen in the last few slides “correct” the externality problem.They are known as Pigovian taxes and subsidies, after the

54、 English economist Arthur Cecil Pigou, who first demonstrated the use of government taxes and subsidies in bringing about an efficient level of output in the presence of externalities.Pigovian taxes are especially popu

55、lar with economists, because they increase efficiency while bringing in tax revenue; then (in theory) this allows inefficiency-causing taxes in other markets to be reduced, a double dividend of taxation.,Should We Tax Ci

56、garettes and Soda?,The consumption of cigarettes and soda are thought to have negative externalities. Why?Both cigarettes and soda have negative health consequences.This by itself is not sufficient to be a negative ext

57、ernalityBut people’s medical expenses are shared with others, either via public or private health insurance.Therefore we expect there to be too much consumption of cigarettes and soda, and they are candidates for Pigo

58、vian taxes.In general, cigarettes are taxed much more heavily than soda. Is this appropriate?,Should We Tax Cigarettes and Soda?—cont.,Alternatives to Taxation for Solving Externalities,The traditional solution to the

59、externality problem is command-and-control: an approach that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit, or requiring firms to install specific pollution-con

60、trol devices.Example: Requiring car manufacturers to equip cars with catalytic converters.Problem: What if firms have very different costs of reducing pollution? It may not be efficient for them to reduce pollution b

61、y the same amount.,Two Car Manufacturers,Suppose Ford can reduce pollution in its cars very cheaply, while GM has very high costs of reducing pollution.If we want to achieve a particular level of pollution-reduction, i

62、t would be efficient to ask Ford to reduce pollution more than GM.But this doesn’t seem fair to Ford; why should GM be held to a lesser standard?The efficient solution has Ford perform more pollution reduction, but h

63、ave GM compensate Ford; both companies can be made better off, compared with requiring both to reduce pollution by a moderate amount, while keeping the amount of pollution reduction the same.,Tradable Emissions Permits,T

64、his is the concept behind tradable emissions permits, also known as cap-and-trade:The government establishes an allowable amount of emissions.Emissions permits are distributed.Firms can trade emissions permits.Firms

65、with high costs of reducing pollution will buy permits form firms with low costs of reducing pollution, ensuring that pollution is reduced at the lowest possible cost.Hence the market is used to achieve efficient pollut

66、ion reduction.,The Sulfur Dioxide Cap-and-Trade System,In 1990, Congress enacted a cap-and-trade system for sulfur dioxide emissions.Improvements in pollution reduction technology resulted, with the cost of compliance e

67、nding up almost 90% less than firm initially estimated.This program was very effective, with benefits at least 25 times the cost of implementing the program.However by 2013, the program had effectively ended. Why?Fur

68、ther emissions reductions were needed; President Bush attempted to lower the cap, but Congress resisted.As a result, the EPA decided to return to a command-and-control approach in order to achieve the reductions.While