Chapter 9 Externalities and Public Goodshomepage.ntu.edu.tw/~luohm/econ2015f/chapter09.pdf ·...
Transcript of Chapter 9 Externalities and Public Goodshomepage.ntu.edu.tw/~luohm/econ2015f/chapter09.pdf ·...
Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Part II: Foundation of Microeconomics
5. Consumers and Incentives
6. Sellers and Incentives
7. Perfect Competition and the Invisible Hand
8. Trade
9. Externalities and Public Goods
10. The Government in the Economy: Taxation
and Regulation
11. Markets for Factors of Production
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Chapter 9
Externalities and Public Goods
2015.10.30.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
1 Externalities
2 Private Solutions to Externalities
3 Government Solutions to Externalities
4 Public Goods
5 Common Pool Resource Goods
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Q: How can the Queen of England lower her
commute time to Wembley Stadium?
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
• 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.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
• 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.
• Government can play a role in improving
market outcomes in such cases.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
9.1 Externalities• Assume that the electricity industry is a perfectly
competitive market
Exhibit 9.1 The Market for Electricity
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
• 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.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
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.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
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, Qoptimal is less than Qmarket .
• Markets will produce too much, resulting in too much
pollution.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
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.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
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.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Exhibit 9.4 The Market Equilibrium for Education
• Assume that education is a perfectly competitive market.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
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,
Qmarket is less than Qoptimal .
• The yellow-shaded triangle represents the deadweight
loss of the positive externality. Why?
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Pecuniary Externaltities
• More people buying a good and thereby causing a
negative market impact for others is called a pecuniaryexternality.
• Pecuniary externalities exist when market transaction
affect other people, but only through the market price.
• Pecuniary externalities do not create market
inefficiencies.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
9.2 Private Solutions to
Externalities
• 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.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Private 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.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
• 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.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
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.
• Private bargaining will lead to an efficient allocation of
resources.
• Government intervention is not necessary to solve
externality problems.
• The initial property right allocation is an important
determinant of the distribution of surplus.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
born 1910.12.29 published 2011.8.1
Nobel Prize in Economics (1991)
died 2013.9.2
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
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.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Private Solution: Doing the Right Thing
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
Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource GoodsWhy 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.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
9.3 Government
Solutions to
Externalities
Government 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.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Government 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.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Government 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.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
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.
Exhibit 9.6 Effect of a Pigouvian Tax
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
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
Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Pay As You Throw: Consumers Create Negative Externalities
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!
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
• 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)
1996 576 水費之50% 隨水費徵收
1997 561 水費之63% 隨水費徵收
1998 593 6.3元/度自來水 隨水費徵收
1999 533 7.3元/度自來水 隨水費徵收
2000 481 4.0元/度自來水,0.5元/公升 2000.7.1 起隨袋徵收
2001 377 0.5, 0.45/公升 隨袋徵收
2002 281 0.45/公升 隨袋徵收
2003 251 0.45/公升 隨袋徵收
2004 226 0.45/公升 廚餘回收
2005 205 0.45/公升 廚餘回收
2006 199 0.45/公升 廚餘回收
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
9.4 Public GoodsTwo characteristics that differentiate public goods
and private goods.1. Excludability:
• Private 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:• Private 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
Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Exhibit 9.8 Four Types of Goods
1. Ordinary Private Goods: excludable, rival.
2. Club Goods: excludable, non-rival.
3. Common Pool Resource Goods: non-excludable, rival.
4. Public Goods: non-excludable, non-rival.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Government Provision of Public Goods• 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.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
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?)
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
• 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+ $9×2010 = 28.
• Contribute everything payoff : $0+ $10×2010 = 20.
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Chapter 9
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and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Exhibit 9.9 Constructing a Market Demand Curve for a Private 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
Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Exhibit 9.10 Constructing a MarketDemand 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.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Exhibit 9.11 The Equilibrium Point for Providing a Public Good
• At Qoptimal , total surplus is maximized because all of the
gains in the market are reaped.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Private Provision of Public Goods• Private provision of public goods refers to any situation
in which private citizens make contributions to the
production or maintenance of a public good.
Exhibit 9.12 Total Giving in the United States Over Time
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
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
Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
• Charismatic species and those that most resemble
humans, such as panda bears and monkeys, receive the
most support.
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
9.5 Common Pool
Resource Goods• 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
Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Solutions to 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.
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Chapter 9
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and Public
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Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
• Why aren’t cows extinct? But African elephants
are at risk of being extinct.
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Chapter 9
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and Public
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Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
What kind of goods are the following goods
belong to?
• 教育。
• 健保。
• 古蹟。
• 十分瀑布。
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Chapter 9
Externalities
and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
Q: How can the Queen of England lower her
commute time to Wembley Stadium?
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Chapter 9
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and Public
Goods
Outline
Externalities
Private
Solutions to
Externalities
Government
Solutions to
Externalities
Public Goods
Common Pool
Resource Goods
• 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 2003.
Exhibit 9.14 Results of the Congestion Charge
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