Transcript Externalities, Commons and Public Goods

Externalities, Commons and
Public Goods
Perloff Chapter 18
Externalities
• When a person’s well being or a firm’s
production capacity is affected directly by
another’s actions.
• Negative
– Chemical plant dumping waste into a lake.
• Positive
– A firm installing shrubs and sculpture benefits
its neighbours
Marginal cost with and Externality
• Marginal Private Cost
– The additional cost incurred when an additional
unit of output is produced.
• Marginal Social Cost
– The full cost incurred by all of society in
producing another unit of output.
– MCs=MCp+MCg
Welfare Effects of Pollution
Price of paper, p,
$ per ton
`
450
s
p
MC = MC + MC
Social
Private
Change
CS
A
A+B+C+D
B+C+D
PSp
B+C+F+G
F+G+H
H-B-C
Cg
C+G
C+D+E+G+H
D+E+H
PSp-Cg
B+F
F-C-D-E
-B-C-D-E
Cs+PSs
A+B+F
A+B+F-E
-E=DWL
g
A
MC p
es
ps = 282
B
C D
H
pc = 240
198
F
84
E
G
ec
MC p
MC g
MC g
30
Demand
0
Qs = 84 Qc = 105
225
Q, Tons of paper per day
Emissions Standard
• Regulate pollution (or output) in order to
achieve the social optimum.
• In the paper example constrain output to 84
units per day. Need to know:
– Demand curve
– Marginal social cost curve
– Relationship between paper production and
pollution.
• Enforcement is costly.
– vary tax with
output (t(Q))
– fixed tax (t)
450
MC p = 198 ps = 282
MC s = MC p + t (Q)
MC p + t
es
0
MC p
t = 84
MC g
MC g = 84
• Tax the pollution
that is produced.
• Tax output
(assuming a fixed
relationship with
pollution)
• Either:
Price of paper, p, $ per ton
Emissions Fee
Demand
Qs = 84
225
Q, Tons of paper per day
Cost benefit Analysis
• Compares the costs and benefits of a
movement away from the market
equilibrium.
• Costs:
– Reduced output of paper
– Consumer surplus reduced
– Producer surplus reduced
• Benefits
– Reduced costs of polution
Cost: less paper
4,000
Benefit: less gunk
2,000
0
105
Maximum
net
benefit
84
63
(b) Marginal Cost and Marginal Benefit
Marginal benefit,
Marginal cost, $
CBA of
polution
Benefit, Cost, $
(a) Cost and Benefit
Q, Tons of paper per day
G, Units of gunk per day
MC
105
84
MB
0
105
84
Q, Tons of paper per day
G, Units of gunk per day
Price of paper, p, $ per ton
Externality With Monopoly
450
MC s = MC p + MC g
et
330
310
282
em
es
A
B
MC p
D
C
ec
240
MC g
30
MR
0
60 70
84
105
Demand
225
Regulation of a Monopoly with an
Externality
• It may be that the monopoly is preferable to
competition if regulation is not possible.
• Charging a tax equal to the MC of pollution
may reduce welfare if monopoly output is
below social optimum.
• Achieving the social optimum may entail
subsidisation of a monopoly.
Property rights
• An exclusive right to use an asset
• Private ownership of asset
• Right to be free of noise pollution
– Courts could be used to enforce the right
– You could sell the right to someone who wants
to be noisy.
• In many cases the rights are not assigned.
Coase Theorem: No property Rights
Boat firm: Boats rented per day
0
Chemical firm:
tonnes dumped
per day.
0
1
2
1
$0
$0
2
$14
$0
$0
$0
$10
$10
$10
$0
$15
If property rights are with boat owner:
Minimum price per unit of pollution is $5
Maximum price is $10
$15
$5
$10
$2
$15
-$3
$15
If property rights are with chem. firm:
Minimum price per unit of pollution is $5
Maximum price is $7.50
Coase theorem: Property rights with
boat firm
Pollution priced at $7 per tonne
Boat firm: Boats rented per day
0
Chemical firm:
tonnes dumped
per day.
0
1
2
1
$0
$0
$14
$0
$7
$3
$15
$0
$17
$3
$14
$1
2
$12
$3
$16
$1
$11
$1
Coase theorem: property rights with
chemical firm
Pollution priced at $6 per tonne
Boat firm: Boats rented per day
0
Chemical firm:
tonnes dumped
per day.
0
1
2
1
-$12
$12
$2
$12
-$6
$16
$3
$12
$4
$16
$0
$15
2
-$1
$16
$2
$15
-$3
$15
Coase Therorem: Summary
• Assigning property rights results in the
efficient outcome.
• Efficiency is achieved regardless of who has
the property rights.
• The distribution of welfare in the efficient
outcome is dependent on the initial
allocation of property rights.
Common Property
• Unlike private property people cannot be
excluded.
• When deciding how much to use, people ignore
the impacts on others so the resource is overused.
• Common pool, water, gas, oil.
• Internet
• Roads
• Fisheries
Public Goods
• Non-Excludability
– People cannot be prevented from consuming a good.
• Non rivalry
– The good is not used up when one person uses it.
Markets for public goods
Price of guard service,
$ per hour
• Only exist for excludable goods.
• Demand curve is the vertical summation of individual willingness-topay or demand curves
25
D
18
D1
13
ep
10
es
Supply, MC
8
7
D2
3
2
0
4
5
7
9
Guards per hour
Free riding
Voting for the provision of a public
good