Negative externalities

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Transcript Negative externalities

Chapter 10
Acid Rain on
Others’ Parades
Chapter 10 - 1 © 2010 Pearson Education Canada
© 2010 Pearson Education Canada
Acid Rain on Others’ Parades
Externalities, Carbon Taxes,
Free Riders & Public Goods
Chapter 10 - 2 © 2010 Pearson Education Canada
LEARNING OBJECTIVES
10.1 Identify how government subsidies can
internalize positive externalities to create
smart social choices
10.2 Describe how externalities make smart
private choices different from smart social
choices
10.3 Explain the rule for coordinating private choices
that cause negative externalities with smart
social choices
Chapter 10 - 3 © 2010 Pearson Education Canada
continued…
10.4 Identify how government policies can
internalize externalities for polluters
to create smart social choices
10.5 Explain how positive externalities create
the free-rider problem and cause markets
to fail
Chapter 10 - 4 © 2010 Pearson Education Canada
HANDCUFFING THE INVISIBLE HAND
MARKET FAILURE WITH EXTERNALITIES
Negative or positive
externalities make
smart private choices
different from
smart social choices.
Chapter 10 - 5 © 2010 Pearson Education Canada
MARKET FAILURE WITH EXTERNALITIES
• Smart choices require that all
additional benefits and additional
opportunity costs — including externalities —
are counted
–
negative externalities (external costs)
costs to society from your private choice
that affect others, but you do not pay
–
positive externalities (external benefits)
benefits to society from your private choice
that affect others, but others do not pay you for
Chapter 10 - 6 © 2010 Pearson Education Canada
continued…
• Negative externalities
Private
External
Social
= (Opportunity) + (Opportunity)
Costs
Costs
Costs
Chapter 10 - 7 © 2010 Pearson Education Canada
continued…
• Positive externalities
Social
Benefits =
Private
Benefits
Chapter 10 - 8 © 2010 Pearson Education Canada
+
External
Benefits
continued…
• Externalities occur when no clear property rights
• With externalities, prices don’t reflect all social costs
and benefits, preventing markets from coordinating
private smart choices with social smart choices
• Externalities cause market failures
–
produce too many things with negative
externalities (pollution, traffic jams)
–
produce too few things with positive
externalities (vaccinations, education)
Chapter 10 - 9 © 2010 Pearson Education Canada
WHY RADICAL ENVIRONMENTALISTS DISLIKE ECONOMISTS
NEGATIVE EXTERNALITIES & EFFICIENT POLLUTION
To coordinate
smart private choices
that generate
negative externalities
with smart social choices,
choose the
quantity of output where
marginal social cost equals
marginal social benefit.
Chapter 10 - 10 © 2010 Pearson Education Canada
NEGATIVE EXTERNALITIES & EFFICIENT POLLUTION
• “Efficient pollution” balances additional
environmental benefits with additional
opportunity costs of reduced living standards
• Socially desirable amount of pollution is not zero
–
at some point additional opportunity
costs of reductions in pollution are
greater than additional benefits
Chapter 10 - 11 © 2010 Pearson Education Canada
continued…
• Smart choice rule: choose quantity of output where
marginal social cost equals marginal social benefit
Marginal
Marginal
Social Cost = Private +
(MSC)
Cost
Marginal
External
Cost
Marginal
Marginal
Social Benefit = Private +
(MSB)
Benefit
Marginal
External
Benefit
Chapter 10 - 12 © 2010 Pearson Education Canada
continued…
Figure 10.1
Demand, Supply & Externalities
Demand
Supply
Output
MPB
MSB
Output
MPC
MSC
1
$140
$140
1
$50
$ 80
2
$120
$120
2
$60
$ 90
3
$100
$100
3
$70
$100
4
$ 80
$ 80
4
$80
$110
5
$6 0
$ 60
5
$90
$120
Chapter 10 - 13 © 2010 Pearson Education Canada
• Markets overproduce products/services with
negative externalities
–
price too low because does not include
external costs
Chapter 10 - 14 © 2010 Pearson Education Canada
LIBERATING THE INVISIBLE HAND
POLICIES TO INTERNALIZE THE EXTERNALITY
Government policies can force polluters to pay
the marginal external costs of their pollution.
As a result, polluters internalize externalities/costs
into their private choices, creating smart social choices.
Chapter 10 - 15 © 2010 Pearson Education Canada
MARKET FAILURE WITH EXTERNALITIES
• Without property rights to the environment,
businesses have incentives to save money and
improve profits by ignoring external costs like
pollution and global warming
• Governments can remedy market failures from
externalities by creating social property rights to
environment, making polluting illegal, penalizing
polluters
–
emissions tax
tax to pay for external costs of emissions
Chapter 10 - 16 © 2010 Pearson Education Canada
continued…
Figure 10.2
Pulp Market with $30/T Emissions Tax
Demand
Supply
Output
MPB
MSB
Output
MPC
1
$140
$140
1
$50
$ 80
2
$120
$120
2
$60
$ 90
3
$100
$100
3
$70
$100
4
$ 80
$ 80
4
$80
$110
5
$ 60
$ 60
5
$90
$120
Chapter 10 - 17 © 2010 Pearson Education Canada
MPC + Tax
–
carbon tax
emissions tax on carbon-based fossil fuels
–
cap-and-trade system
limits emissions businesses can release into
environment
• Internalize the externality
transform external costs into costs producer must
pay privately to government
Chapter 10 - 18 © 2010 Pearson Education Canada
continued…
• By giving pollution a price reflecting marginal
external cost of damage done, smart private
choices become smart social choices
• Carbon taxes and cap-and-trade systems are
smart policies for efficient pollution, but
may also be inequitable, hurting lower-income
consumers most
Chapter 10 - 19 © 2010 Pearson Education Canada
WHY LIGHTHOUSES WON’T MAKE YOU RICH
FREE-RIDING ON POSITIVE EXTERNALITIES
Positive externalities
create a free-rider
problem when
neither buyers
nor sellers are paid
for external benefits
their exchange
creates.
Market clearing price too high for buyers to be willing
to buy socially best quantity of output, and too low for
sellers to be willing to supply.
Chapter 10 - 20 © 2010 Pearson Education Canada
FREE-RIDING ON POSITIVE EXTERNALITIES
• Public goods
provide external benefits consumed simultaneously
by everyone; no one can be excluded
–
public goods like lighthouses and national
defence are extreme examples of positive
externalities
–
free-rider
someone who does not have to pay for
external benefits
Chapter 10 - 21 © 2010 Pearson Education Canada
continued…
• Smart choice rule: choose quantity of output where
marginal social cost equals marginal social benefit
• Because of free-rider problem
–
markets underproduce products/services with
positive externalities
–
price charged to buyers is too high
–
price received by sellers is too low
–
market price does not incorporate external
benefits
Chapter 10 - 22 © 2010 Pearson Education Canada
Figure 10.3
Post-Secondary Market
Demand
Supply
Output
MPB
MSB
Output
MPC
MSC
100
$7000
$10000
100
$2500
$2500
200
$6000
$ 9000
200
$3000
$3000
300
$5000
$ 8000
300
$3500
$3500
400
$4000
$ 7000
400
$4000
$4000
500
$3000
$ 6000
500
$4500
$4500
600
$2000
$ 5000
600
$5000
$5000
700
$1000
$ 4000
700
$5500
$5500
Chapter 10 - 23 © 2010 Pearson Education Canada
WHY YOUR TUITION IS CHEAP (REALLY!)
SUBSIDIES FOR THE PUBLIC GOOD
Government policies can reward businesses and
individuals creating positive externalities.
As a result, they internalize the externalities/
rewards, turning smart private choices into
smart social choices.
Chapter 10 - 24 © 2010 Pearson Education Canada
SUBSIDIES AND PUBLIC GOODS
• Government policy tools to get all to voluntarily
choose output where marginal social benefit equals
marginal social cost
–
subsidy
payment to those creating positive externalities
–
public provision
government provision products/services with
positive externalities, financed by tax revenue
• Subsidies and public provision remove the wedge
positive externalities drive between prices for buyers
and for sellers, inducing voluntary choice of output
best for society
Chapter 10 - 25 © 2010 Pearson Education Canada
continued…
Figure 10.4 Post-Secondary Market with $3000 Subsidy
Demand
Output
MPB
Supply
MSB
Output
MPC
MPC —
Subsidy
100
$7000
$10000
100
$2500
200
$6000
$ 9000
200
$3000
$0
300
$5000
$ 8000
300
$3500
$500
400
$4000
$ 7000
400
$4000
$1000
500
$3000
$ 6000
500
$4500
$2500
600
$2000
$ 5000
600
$5000
$2000
700
$1000
$ 4000
700
$5500
$2500
Chapter 10 - 26 © 2010 Pearson Education Canada
-$500
Chapter 10
Refresh Slides
Chapter 10 - 27 © 2010 Pearson Education Canada
MARKET FAILURE WITH EXTERNALITIES
1. What is a negative externality? a positive
externality?
2. Talking in large lecture halls is a problem both
for instructors who can’t concentrate and
attentive students who can’t hear. Can you
explain this problem in terms of externalities?
Why is this problem hard to solve?
Chapter 10 - 28 © 2010 Pearson Education Canada
continued…
3. Many condominiums have strict rules about the
colour of window-coverings. Why do these rules
arise? Is it fair to restrict the choices of property
owners in this way?
Chapter 10 - 29 © 2010 Pearson Education Canada
NEGATIVE EXTERNALITIES & EFFICIENT POLLUTION
1. What is the rule for finding efficient
combinations of output and pollution?
2. If the marginal external cost of pollution in
Figure 10.1 were $60 per tonne instead of $30
per tonne, what would be the smart choice for
society of pulp output? What would be the smart
price of a tonne of pulp?
Chapter 10 - 30 © 2010 Pearson Education Canada
continued…
3. What position on DDT do you support (see story
from Economics Out There, page 245)? What
additional information do you need before you
decide?
Chapter 10 - 31 © 2010 Pearson Education Canada
POLICIES TO INTERNALIZE THE EXTERNALITY
1. What is a carbon tax, and how does it
“internalize the externality” for a polluting
business?
2. Some environmental groups try to expose
businesses that pollute while supporting
environmentally friendly businesses by posting
information and photos on public websites
(for example, www.secrecyistoxic.ca).
Explain the strategy and how this may
“internalize the externality” for the polluters
even without government action.
Chapter 10 - 32 © 2010 Pearson Education Canada
continued…
3. While carbon taxes and cap-and-trade systems
have the same objective, governments and
political parties differ in which policy they
support. What are the positions of the
Conservatives, the Liberals, the NDP, and the
Green Party? Which position makes the most
sense to you?
Chapter 10 - 33 © 2010 Pearson Education Canada
FREE-RIDERS & POSITIVE EXTERNALITIES
1. What is the free-rider problem? Why is
free-riding a problem?
2. Smart students often don’t like group projects.
Explain why, using the concept of free-riding.
3. Two physically identical houses can have
very different values depending on their
neighbourhoods. How do positive (or negative)
externalities help explain property values?
Chapter 10 - 34 © 2010 Pearson Education Canada
SUBSIDIES & PUBLIC GOODS
1. What should the amount of a smart government
subsidy be equal to? Why?
2. What if the government gave the $3000 subsidy
from Figure 10.4 directly to students instead of to
schools? Construct a table like Figure 10.3 and
discover whether the students’ private choices
would still be the same as the smart choice for
society? [Hint: The Marginal Private Benefit column
shows willingness to pay. Create a new column
showing willingness to pay with the subsidy
(Marginal Private Benefit + Subsidy).]
Chapter 10 - 35 © 2010 Pearson Education Canada
continued…
3. Some European countries have free tuition for
post-secondary education. If you were a member
of parliament who wanted to defend this policy
(knowing that any money needed to support
education had to be raised by new taxes), what
arguments would you make? If you wanted to
defend the Canadian system, where students
must pay some tuition, what arguments would
you make?
Chapter 10 - 36 © 2010 Pearson Education Canada