Chapter Eighteen. Externalities, Open Access, and Public Goods презентация

In this chapter, we examine six main topics
Externalities
The inefficiency of competition with externalities
Market structure and externalities
Allocating property rights to reduce externalities
Open-access common property
Public goods

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.

Private cost
The cost of production only, not including externalities
Social cost
The private cost plus the cost of the harms from externalities

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.

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.

Demand

MC

p

MC

g

MC

g

MC

s

=

MC

p

+

MC

g

450

p

s

= 282

p

c

= 240

30

84

198

Q

c

=

105

Q

s

=

84

225

0

e

c

e

s

A

B

F

C

D

E

H

G

Q

, Tons of paper per day

MC

p

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, .

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.

Demand

MC

p

MC

g

MC

s

=

MC

p

+

t

(

Q

)

MC

p

+

τ

τ

=

84

450

p

s

= 282

MC

p

= 198

MC

g

= 84

Q

s

=

84

225

0

e

s

Q

, Tons of paper per day

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.

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.

Cost: less paper

Benefit: less gunk

Maximum

net

benefit

84

63

105

0

84

105

G

, Units of gunk per day

Q

, Tons of paper per day

G

, Units of gunk per day

Q

, Tons of paper per day

(a) Cost and Benefit

(b) Marginal Cost and Marginal Benefit

4,000

2,000

105

84

0

MC

MB

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.

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.

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, .

Q

, Tons of paper per day

Demand

MR

MC

p

MC

g

MC

s

=

MC

p

+

MC

g

450

330

310

282

240

30

84

105

225

70

60

0

e

m

e

c

e

s

e

t

A

B

C

D

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

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.

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.

For many bads, such as pollution, and for some goods, property rights are not clearly defined. No one has exclusive property rights to the sir 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.

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.

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

Common Pools.
The Internet.
Roads
Fisheries.

Types of Goods

Markets for Public Goods

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.

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.

Guards per hour

Supply,

MC

25

18

13

10

8

7

3

2

5

7

9

4

0

e

p

e

s

D

1

D

D

2