Principles of Economics. January 2018

Transcription

1 Principles of Economics January 2018

2 Public goods and common resources Contents Inefficient market allocations 10 Public goods and common resources 11 Externalities Principles of Economics January / 18

3 Public goods and common resources Market failure So far impact of government actions has been mainly negative. Sometimes a market failure occurs which warrants some intervention, e.g. public goods externalities non-competitive markets information asymmetries etc. Principles of Economics January / 18

4 Public goods and common resources Different kind of goods It is useful to classify goods according to: 1 Is the good excludable? (Can non-payers be prevented from using it) 2 Is the good rival? (Does one person s use diminish others ability to use it) Principles of Economics January / 18

5 Public goods and common resources Public goods and the free rider problem Example Consider a town of 500 residents each of whom values seeing fireworks at AC10. The cost of a fireworks display is AC1000. Because benefits AC5000 is greater than the cost AC1000, it would be efficient to have a fireworks display. Yet markets may not produce a display because each potential payer is aware that he can t be excluded from seeing a display that is paid by the others. Government can in this case make everyone better off by organizing the fireworks display and collecting funding by taxes. Positive externalities An example of strategic behavior. Game theory is the tool to analyze strategic behavior. Principles of Economics January / 18

6 Public goods and common resources Public goods Some important public goods National defence Basic research Society without poverty Government faces a tough job in making a cost-benefit analysis. Prices do not give signals of value. Principles of Economics January / 18

7 Public goods and common resources Common resources Like public goods common resources are not excludable. Available free of charge Unlike public goods common resources are rival. Use of a common resource reduces other people s ability to use it Tragedy of the commons Common resources get used more than is desirable for the society as a whole. Principles of Economics January / 18

8 Public goods and common resources Tragedy of the commons Example In a medieval town all residents are allowed to graze their sheep on a common land. With growing number of sheep and fixed amount of land, the land eventually loses its ability to replenish itself. Raising sheep becomes impossible and families lose their source of livelihood. No shepherd had a private incentive to limit grazing. Only a collective agreement could have saved the land. Negative externalities Several solutions: Regulation Taxes on sheep Private ownership of land Principles of Economics January / 18

9 Public goods and common resources Common resources Some important common resources: Fish, whales and other wildlife Clean air and water Congested roads Both with public goods and common resources markets fail because property rights are not well established. Principles of Economics January / 18

10 Externalities Externalities Market failures in case of public goods and common resources could be seen as examples of externalities Externality arises when well-being of a third party is affected by an activity. Positive or negative Individual decision-maker does not take these effects into account Market allocation may not be efficient in presence of externalities Principles of Economics January / 18

11 Externalities Externalities Some further examples: Exhausts from car (negative) Restored historic buildings (positive) Barking dogs (negative) Research (positive) Vaccinations (positive) Principles of Economics January / 18

12 Externalities Equilibrium is efficient in absence of a market failure Principles of Economics January / 18

13 Externalities Pollution and social optimum Social cost includes private cost and external cost. Tax? Principles of Economics January / 18

14 Externalities Education and social optimum Social value includes private value and external benefit. Subsidy? Principles of Economics January / 18

15 Externalities Private solutions to externalities Private solutions: Moral codes Charities (e.g. Greenpeace, Universities) Contracts Coase theorem: If private parties can bargain without cost over the allocation, an efficient allocation is reached. Problems in real world: transaction costs, complexity, asymmetric information, etc.. Principles of Economics January / 18

16 Externalities Public policies toward externalities Regulation Pigovian taxes and subsidies Tradable pollution permits Principles of Economics January / 18

17 Externalities Equivalence of Pigovian taxes and pollution permits Principles of Economics January / 18

18 Externalities Equivalence of Pigovian taxes and pollution permits Principles of Economics January / 18