Ch. 16 [Externalities]
Examples of transaction cost:
Costs of communication; Cost of making legally binding agreements; Costs of coordinating relevant parties
Is it possible to have zero pollution?
False, optimal quantity of pollution isn't zero
An emissions tax is a form of:
Pigouvian tax
Goods with network externalities exhibit positive feedback:
The good with the largest network eventually dominates the market, and rival goods disappear. As a result, in early stages of the market, firms have an incentive to take aggressive actions, such as lowering price below production cost, to enlarge the size of their good's network.
The socially optimal quantity of the good or activity can be achieved by:
an optimal Pigouvian subsidy
Positive externalities
are external benefits
Negative externalities
are external cost
Tradable emissions permits
are licenses to emit limited quantities of pollutants that can be bought and sold by polluters
Network externalities
arise when the value of a good increases when a large number of other people also use the good.
When the quantity of pollution emitted can be directly observed and controlled, environmental goals can be achieved efficiently in what two ways:
emissions taxes and tradable emissions permits
Governments often limit pollution with:
environmental standards
Standards that are an inefficient way to reduce pollution because they are inflexible:
environmental standards
The optimal Pigouvian tax is:
equal to the marginal social cost of pollution at the socially optimal quantity of pollution
Coase theorem
even in the presence of externalities an economy can always reach an efficient solution as long as transaction costs are sufficiently low
Externalities
external costs and benefits
According to Coase theorem, the private sector can sometimes resolve externaliies on its own:
if transaction cost AREN'T too high , individuals can reach a deal to internalize the externality. When transaction costs ARE too high, government intervention may be warrented.
Left to itself, a market economy will typically generate an:
inefficiently high level of pollution because polluters have no incentive to take into account the costs they impose on others.
External benefit
is a benefit that an individual or firm confers on others without receiving compensation
Pigoucian subsidy
is a payment designed to encourage activities that yield external benefits
Emissions tax
is a tax that depends on the amount of pollution a firm produces
Technology spillover
is an external benefit that results when knowledge spreads among individuals and firms
External cost
is an uncompensated cost that an individual or firm imposes on others.
Marginal social cost of pollution
is the additional cost imposed on society as a whole by an additional unit of pollution
Marginal social benefit of pollution
is the additional gain to society as a whole from an additional unit of pollution
Environmental standards
rules that protect the environment by specifying actions by producers and consumers
Pigouvian taxes
taxes designed to reduce external costs
Transaction costs
the costs to individuals of making a deal
The most important example of external benefits in the economy is:
the creation of knowledge through technology spillover
Socially optimal quantity of pollution is:
the quantity at which the marginal social cost of pollution is equal to the marginal social benefit of pollution.
The marginal social cost of a unit of pollution is equal to:
the sum of the willingness to pay among all members of society to avoid that unit of pollution.
Benefits of emission taxes and tradable emissions permits
these methods are efficient because they are flexible, they allocate more pollution reduction to those who can do it more cheaply, and they also motivate polluters to adopt new pollution-reducing technology.
Goods with externalities pose special problems for antitrust regulators because:
they tend toward monopoly; it can be difficult to distinguish what is a normal growth of the network and what is an illegal monopolization effort by producers.
When there are positive externalities, or external benefits, a market economy left to itself will typically produce:
too little of the goods or activity
Internalize the externality
when individuals take external cost or benefits into account
Positive feedback
when success breeds greater success and failure breeds further failure.
