8/10/2019 Externalities Revision

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er t goo create post ve sp over ene ts, un er pro uce(i.e. religious schools)-MSB > MSC when sold on open market-encourage consumption to capture potential welfare gain.

Public good(i.e. roads, prisons, streetlights)-non-rivalrous one persons consumption does not preventothers from enjoying it.-non-excludible producer cannot precent particular individualsfrom enjoying the benefits.

Demerit good negative spillover costs to t hird parties.(i.e. drugs, alcohol)-persuasion, taxation, regulation, ban

Negative production externalities - making of aproduct creates spillover costs to others MSC > MPC(i.e. air poillutions, workershealth)Solutions:Tax shift MPC left,

-welfare loss reduced, internalize, output goes down-magnitude & tax hard to assess, cannot deter, only

reduce.Legislation & regulation

-laws costly to implement, government resourcescosts, legal expenses.

-extreme ban good.

Negative consumption externalities- use of productcreates spillover costs to others MPB < MSB(i.e. smoking, alcohol, automobiles)Solutions:Legislation & Regulation

-deem activities illegali, limited or restricted-great bureaucracy required to enforce

Taxation-interalize make actors involved pay-shift MPC left, reduce consumption.

Advertising & Persuation-discourage further use of product, MPB shifts left]-advertising - expensive

Tragedy of the commonscommonresources are used and degraded rapidly byprivate individuals for short term benefits(e.g. forests, water sources)-free rider problem users do not pay marketprice and have little incentive to ration it

Fossil fuel consumption:-air pollution, acid rain, threaten habitats

Poverty in less developed countries:-income rise, demand for advanced goods,import trade with rich countries --incomesrise slower than rich countries-sell more primary goods depleteing other

resources, debt burden

Potential solutions to sustainabilityproblemsExtension of property rights-create long term interest in survivalCarbon taxes-internalize externalitiesTradable permits-system of taxing pollution levels wherepollution licenses are exchangable bewteenfirms-total licensed pollution perfectly inelastic

Factor immobility

-workers will stay in an area-land & natural resources fixed

Inequality-nature of opportunities being exploited-redistrubution of income progressive tax,welfare insurance

-poorly designed, unforeseen consequences,trade votes

Short-termism-rational short term objectives cause long termproblems stock valuations rewards-politicians create policies for elections-opportunity costs forgone services.

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- negat ve externa t es create externacosts. When there are external costs, MSC> MSB at the point of production by themarket.-All positive externalities create externalbenefits. When there are external benefitsMSB > MSC at the point of production bythe market.-All production externalities create adivergence between private and socialcosts (MPC and MSC).-All consumption externalities (positive andnegative) create a divergence betweenprivate and social benefits (MPB and MSB).

Externality - when the actions ofconsumers or producers give rise to

negative or positive side-effects onother people who are not part of theseactions, and whose interests are nottaken into consideration.

ar et a ure: exsts w enever t e reemarket equlibrium quantity of output isfreat or less than the socially optimallevel of output. The free market willproduce too much or too little of a good.-More (or less) is sold at a lower (orhigher) price than is socially desirable.Types of market failure:-nega

tive/positive externalities-lack of public goods-common access to resources and threatto sustainability-asymmetirc information-abuse of monopoly power.

ere t ere are externa t es:-social benefits = private benefit + external benefit-social costs = private cost + external costs.

Where no externalities exist:-social benefits = private benefits-social costs = private costs

-costs to pro ucers o pro ucng onemore unit of a goodMSC - costs to society of producing one moreunit of a goodMPB - benefits to consumers from consumingone more unit of a goodMSB- benefits to society from consuming onemore unit of a goodPareto Optimal market situation where noone can be made better off without makingsomeone worse off.

Positive production externatlities - making of aproduct creates spillover benefits to others - MPC>MSC(i.e. tree farms, workers training, research)Solutions:Subsidies

-pay industry, push MPC right,-money drawn from other areas.

State provision of the article-directly provide the good-costly, accurately predict needs.

os t ve consumpton externa t es- use o aproduct creates spillover benefits to others(i.e. education)Solutions:Subsidies

-make good more affordable, shift MPC right-opportunity cost of subsidy vs. merit of good

Advertising-a

dvertise benefits, campaign, shift MPB right-may be affected by cultural attitudes

Legal requirements-legally mandate behavior, unlikely complicance

unless publicly procided.-size of potential benefits