Chapter 9 Externalities and Public Goods. Outline. Externalities. Private Solutions to Externalities. Government Solutions to Externalities

Transcription

1 Public Resource Part II: Foundation of Microeconomics 5. Consumers and Incentives 6. Sellers and Incentives 7. Perfect Competition and the Invisible Hand 8. Trade The in the Economy: Taxation and Regulation 11. Markets for Factors of Production 1 / 47

2 Public Resource / 47

3 Public Resource Public 5 Resource 3 / 47

4 Public Resource Q: How can the Queen of England lower her commute time to Wembley Stadium? 4 / 47

5 Public Resource There are important cases in which free markets fail to maximize social surplus. This chapter discusses three such cases: externalities, public goods, and common pool resources. 5 / 47

6 Public Resource One common link between these three examples is that there is a difference between the private benefits and costs and the social benefits and costs. can play a role in improving market outcomes in such cases. 6 / 47

7 9.1 Assume that the electricity industry is a perfectly competitive market Public Resource Exhibit 9.1 The Market for Electricity 7 / 47

8 Public Resource However, the power plant imposes an externality on the public as a by-product of producing electricity. An externality occurs when an economic activity has either a spillover cost or a spillover benefit on a bystander. 8 / 47

9 Public Resource A Broken Invisible Hand: Negative Externalties The plant imposes a negative externality, because by producing electricity it creates a spillover cost that it does not consider when making production decisions. When there are negative externalities present, the market outcome is no longer efficient. This is because negative externalities impose an additional cost on the society that is not explicitly recognized by the buyers and sellers in the market. 9 / 47

10 Public Resource Exhibit 9.2 The Socially Optimal Quantity and Price of Electricity Marginal social cost (MSC)= marginal cost + marginal external cost. Taking into account the extra costs imposed on society by the plant s pollution, Q optimal is less than Q market. Markets will produce too much, resulting in too much pollution. 10 / 47

11 Public Resource Exhibit 9.3 Deadweight Loss Due to a Negative Externality The yellow-shaded triangle represents the deadweight loss of the negative externality. Why? However, pollution is not driven to zero. 11 / 47

12 Public Resource A Broken Invisible Hand: Positive Externalties An important example of a positive externality is educational attainment, which not only helps a student through better employment opportunities and higher wages but also confers significant benefits on others. The most often cited benefits of education are the following: Education increases civic engagement, thereby contributing to a more informed democratic society. An educated workforce is vital for innovation and adoption of new technologies. An educated citizenry will be less likely to commit crime. 12 / 47

13 Public Resource Exhibit 9.4 The Market Equilibrium for Education Assume that education is a perfectly competitive market. 13 / 47

14 Public Resource Exhibit 9.5 Deadweight Loss of a Positive Externality Marginal social benefit (MSB)=marginal benefit + marginal external benefit Taking into account the extra benefit of education, Q market is less than Q optimal. The yellow-shaded triangle represents the deadweight loss of the positive externality. Why? 14 / 47

15 Public Resource Pecuniary Externaltities More people buying a good and thereby causing a negative market impact for others is called a pecuniary externality. Pecuniary externalities exist when market transaction affect other people, but only through the market price. Pecuniary externalities do not create market inefficiencies. 15 / 47

16 Public Resource 9.2 One fundamental theme unites the multiple solutions to externalities, whether public or private: internalizing the externality. ( 外部成本內部化 ) When individuals or companies take into account the full costs and benefits of their actions, economists say that they are internalizing the externalities. When the external effects of their actions are internalized, the general result is that the market equilibrium moves toward higher social well-being. 16 / 47

17 Public Resource Solution: Bargaining power plant v.s. local fishermen (there is no law against polluting the waterways) The power plant can eliminate the toxins that it emits by purchasing and installing scrubbers at the cost of $5 million. If the fishermen can convince the power plant to install the scrubbers, they will receive benefits of approximately $7 million. What is the outcome if the fisherman and power plant do not communicate? The power plant is not interested in spending $5 million on scrubbers. 17 / 47

18 Public Resource This market outcome is not socially efficient because total well-being could be increased. If the power plant and the fishermen can communicate, a deal will be brokered in which the fishermen give an amount of money between $5 million and $7 million to the power plant, and the power plant installs the scrubbers. Consider the opposite case where there is a law against the power plant polluting the waterways. If the power plant chose not to shut down, it would then have installed the scrubbers, thereby eliminating the water pollution. Regardless whether the law permits the power plant to pollute or not, the economically efficient outcome is achieved either way. 18 / 47

19 Public Resource The Coase Theorem The insight that negotiation leads to the socially efficient outcome regardless of who has the legal property right (ownership of property or resources) is called the Coase Theorem, after the Nobel Laureate economist, Ronald Coase. bargaining will lead to an efficient allocation of resources. intervention is not necessary to solve externality problems. The initial property right allocation is an important determinant of the distribution of surplus. 19 / 47

20 Public Resource born published Nobel Prize in Economics (1991) died / 47

21 Public Resource Potential problems in applying the Coase theorem and private solutions to solve the externality problem. The assumption that the parties involved can negotiate economically is critically important. As long as the transaction costs associated with negotiating are not too high, the efficient economic outcome can be achieved. Whether the property right is clearly defined is important. The number of agents on each side of the bargaining table matters. Transaction costs rises with the number of agents. 21 / 47

22 Solution: Doing the Right Thing Public Resource Do you buy Energy Star goods? ENERGY STAR is a voluntary labeling program to reduce greenhouse-gas emissions. The ENERGY STAR program has worked because it involves a social enforcement mechanism: it gives us information about green products and invokes a moral code that we should do the right thing and purchase them. 22 / 47

23 Public Resource Why do you recycle? The moral code of doing one s part is internalizing externalities. Shame, guilt, and the risk that we will be publicly decries are all effective social enforcement mechanism. 23 / 47

24 Public Resource 9.3 respond to exernalities in two main ways 1. Command-and-control policies, in which government directly regulates the allocation of resources. 2. Market-based policies, in which the government provides incentives for private organizations to internalize the externality. 24 / 47

25 Public Resource Regulation: Command-and-Control Policies Under command-and-control regulation, policymakers either directly restrict the level of production or mandate the use of certain technologies. This type of regulatory action that command-and-controls certain technique typically provides few incentives for producers to search for more cost-effective ways to reduce pollution itself. This happens because regulators have directed attention to the wrong target they mandate the technology that the producer must use. This pushes the producer to develop efficient methods to use the mandated technology. 25 / 47

26 Public Resource Regulation: Market-Based Approaches A market-based approach internalize externalities by harnessing the power of market forces. With the market-based approach, the method for reducing pollution is essentially left to the emitter. There is a greater incentive to develop new ways to reduce pollution than in the command-and-control approach. 26 / 47

27 Corrective Taxes and Subsidies A corrective tax (or Pigouvian tax) is a tax designed to induce agents who produce negative externalities to reduce quantity toward the socially optimal level. The corrective tax internalize the pollution externality. Public Resource Exhibit 9.6 Effect of a Pigouvian Tax 27 / 47

28 Public Resource Exhibit 9.7 Effect of a Pigouvian Subsidy on the Education Market A corrective subsidy (or Pigouvian subsidy) is designed to induce agents who produce positive externalities to increase quantity toward the socially optimal level. Estimate the marginal social benefit of education, the levy a corrective subsidy in this amount to to increase the equilibrium quantity. 28 / 47

29 Public Resource Pay As You Throw: Consumers Create Negative Too! Pay-As-You-Throw programs charge people a small price for each bag of trash they produce. These programs reduce the amount of trash people throw out. Moving to a Pay-As-You-Throw program reduced household trash by more than a ton per year! 29 / 47

30 Public Resource 垃圾費隨水費 versus 隨袋徵收 台北市的垃圾費與垃圾量 平均每人年產垃圾費計價方式年度垃圾 ( 公斤 ) 水費之 50% 隨水費徵收 水費之 63% 隨水費徵收 元 / 度自來水 隨水費徵收 元 / 度自來水 隨水費徵收 元 / 度自來水,0.5 元 / 公升 起隨袋徵收 , 0.45/ 公升 隨袋徵收 / 公升 隨袋徵收 / 公升 隨袋徵收 / 公升 廚餘回收 / 公升 廚餘回收 / 公升 廚餘回收 30 / 47

31 Public Resource 9.4 Public Two characteristics that differentiate public goods and private goods. 1. Excludability: goods: excludable, people can be kept from consuming them if they have not paid for them. Public goods: non-excludable, it is not possible to exclude people from using them. 2. Rivalry in consumption: goods: rival in consumption, they can not be consumed by more than one person at a time. Public goods: non-rival in consumption, one person s consumption does not preclude consumption by others. 31 / 47

32 Public Resource Exhibit 9.8 Four Types of 1. Ordinary : excludable, rival. 2. Club : excludable, non-rival. 3. Resource : non-excludable, rival. 4. Public : non-excludable, non-rival. 32 / 47

33 Public Resource Provision of Public Public goods suffer from what economists call a free-rider problem, in which a person has no incentive to pay for a good because failure to pay does not prevent consumption. What makes public goods different from private goods is precisely their non-rival and non-excludable nature. Their non-excludability represents a distinct opportunity for government to step in and provide them because it can levy taxes for their provision. The government should expand production until marginal benefits equal marginal cost. 33 / 47

34 Public Resource The Free-Rider s Dilemma You and 9 other students are given $10. You can anonymously, and simultaneously, contribute any portion of it back to a public goods account. The contributions collected will be doubled and the redistributed equally among you and the 9 other students. How much of your $10 would you contribute? To maximize the group s take-home earnings, everyone should contribute the full $10, and take-home $20. (Why?) 34 / 47

35 Public Resource Why do experiments show that contributions average less than $2, with around half of participants contributing nothing? If you give $1 to the group account, then the group as a whole receives $2, but you yourself are only guaranteed 20 cents of that dollar back. A simple illustration. Assume that everyone else contributes everything ($10) to the group account. What are your payoffs if you contribute nothing versus if you contribute everything? Contribute zero payoff: $10 + $ = 28. Contribute everything payoff : $0 + $ = / 47

36 Public Resource Exhibit 9.9 Constructing a Market Demand Curve for a Good To construct the market demand curve for private good, we sum the total quantity demanded of all consumers at a given price to compute the market demand at that price. We add the individual demand curve horizontally. 36 / 47

37 Public Resource Exhibit 9.10 Constructing a Market Demand Curve for a Public Good The market demand curve for public goods is found by vertically summing the individual demand curves because the public good is non-rival. 37 / 47

38 Public Resource Exhibit 9.11 The Equilibrium Point for Providing a Public Good At Q optimal, total surplus is maximized because all of the gains in the market are reaped. 38 / 47

39 Provision of Public provision of public goods refers to any situation in which private citizens make contributions to the production or maintenance of a public good. Public Resource Exhibit 9.12 Total Giving in the United States Over Time 39 / 47

40 Public Resource Exhibit 9.13 Giving Money by Region of the World in 2010 Have you donated money to a charity in the past month? A majority of people answer Yes in developed countries. Even in underdeveloped countries, the proportion of people giving is above 10 percent. 40 / 47

41 Public Resource Charismatic species and those that most resemble humans, such as panda bears and monkeys, receive the most support. 41 / 47

42 Public Resource 9.5 Resource Common pool resource goods are not excludable and rival. The externality involved with a common pool resource aries because of the combination of open access and depletion through use. Individuals use too much of the resource because they do not consider how others are affected, a classic negative externality. Such overuse can result in the tragedy of the commons, which occurs when a common resource is used too intensely. 42 / 47

43 Public Resource tragedy of the commons: Piguvion tax or government regulation. Self-regulate by users that implements a maximum usage. Privatization of the resource (assign property rights). This gives the owner incentives to regulate access in a way that maximizes the resource s value to the owner. 43 / 47

44 Why aren t cows extinct? But African elephants are at risk of being extinct. Public Resource 44 / 47

45 Public Resource What kind of goods are the following goods belong to? 教育 健保 古蹟 十分瀑布 45 / 47

46 Public Resource Q: How can the Queen of England lower her commute time to Wembley Stadium? 46 / 47

47 In the late 1990s, traffic become so congested in central London that travel speed dipped below the 19th-century average before the introduction of the car! A daily flat charge of 5 pounds per day called congestion charge is implemented in Public Resource Exhibit 9.14 Results of the Congestion Charge 47 / 47