Economics Chapter 9
2 things to know about MSC & MSB
*As total pollution falls, the cost savings to a polluter being allowed to emit one more ton rises *Will a market economy, left to itself, arrive at the socially optimal quantity of pollution? NO
4 types of goods
-Private goods - excludable and rival in consumption (wheat) -Public goods: nonexcludable and nonrival in consumption (public sewer system) -Common resources: nonexcludable but rival in consumption (clean water in a river) -Artificially scarce goods - excludable but nonrival in consumption (on-demand movies on DirecTV)
Examples of transaction costs
-The costs of communication among the interested parties (could be very high if many people are involved) -The costs of making legally binding agreements (could be high if expensive legal services are required) -Costly delays involved in bargaining (both sides may hold out in an effort to extract more favorable terms, leading to increased effort and forgone benefit)
In the absence of government action, the quantity of pollution will be inefficient
-polluters will pollute up to the point at which the MSB of pollution is 0 -The benefit to polluters from the last unit of pollution is very low (virtually zero)... The MSC is very high
Why is an emission tax an efficient way to reduce pollution but environmental standards aren't?
Emissions tax ensures that the marginal benefit of pollution is equal for all sources of pollution - an environmental standard doesn't
2 characteristics that are essential if a good is to be efficiently provided by a market economy
Excludable & Rival in Consumption
External Benefits
a benefit that an individual or firm confers on others without receiving compensation
Private Good
a good that is both excludable and rival in consumption
Pigouvian Subsidy
a payment designed to encourage activities that yield external benefits
Emissions Tax
a tax that depends on the amount of pollution a firm produces -An emissions tax equal to the MSC at the socially optimal quantity of pollution induces polluters to internalize the externality - take into account the true costs to society of their actions
Marginal Social Benefit of Pollution
additional benefit to society as a whole from an additional unit of pollution
Marginal Social Cost of Pollution
additional cost imposed on society as a whole by an additional unit of pollution
Technology spillover
an external benefit that results when knowledge spreads among individuals and firms; Greatest sources of technology spillovers = major universities and research institutes
External Cost
an uncompensated cost that an individual or firm imposes on others
Downward sloping marginal social benefit curve (MSB)
because it is progressively harder, and more expensive, to achieve a further reduction in pollution as the total amount of pollution falls (more expensive technology must be used)
Main problem with tradable emissions permits
because it is too difficult to determine the optimal quantity of pollution, governments can find themselves either issuing too many (don't reduce pollution enough) or issuing too few (they reduce pollution too much)
Efficient wat to reduce pollution
ensure that at the industry-wide outcome, the marginal benefit of pollution is the same for all plants
Coase Theorem
even in the presence of externalities an economy can always reach an efficient solution provided that the costs of making a deal are sufficiently low
Private Goods
excludable - producers can charge for them and so have an incentive to produce them rival in consumption - it is efficient for consumers to pay a positive price (a price equal to the marginal cost of production)
Positive Externalities
external benefits
Negative Externalities
external costs
Externalities
external costs and benefits
Nonrival in Consumption
if more than one person can consume the same unit of the good at the same time
Main concern with emissions taxes
in practice, gov officials usually aren't sure how the tax should be set -Too low - too little improvement to the environment -Too high - emissions will be reduced by more than is efficient
Public Good
is both nonexcludable and nonrival in consumption; they suffer from the free-rider problem - so no private firm would be willing to produce them
Tradable Emissions Permits
licenses to emit limited quantities of pollutants that can be bought and sold by polluters -Those with lowest cost will reduce their pollution the most, those with the highest cost will reduce their pollution the least
Free-rider Problem
many individuals are unwilling to pay for their own consumption and instead will take a "free ride" on anyone who does pay
Market economy without government intervention to protect the environment
only the benefits of pollution are taken into account in choosing the quantity of pollution -NOT Qopt; IT IS Qmkt -MSB of pollution at 0 -Qmkt = higher than Qopt Marginal cost of pollution to any given polluter is 0;no incentive to limit the amount of emissions
Emissions taxes and tradable permits
provide incentives to create and use technology that emits less pollution - new technology that lowers the socially optimal level of pollution
Environmental Standards
rules that protect the environment by specifying actions by producers and consumers
Upward sloping marginal social cost curve (MSC)
shows how the marginal cost to society of an additional ton of pollution emissions varies with the quantity of emissions; Upward because nature can handle small amounts of pollution but not a lot as it increases
Research clusters
spurs innovation and competition, theoretical advances, and practical applications; Increase the economy's productivity and raise living standards
2 ways to directly control pollution
taxes & tradable permits
Pigouvian Taxes
taxes designed to reduce external costs
Transaction Costs
the costs of making a deal
Cost-benefit analysis
the estimation and comparison of the social costs and social benefits of providing a public good
How Much of a Public Good Should Be Provided?
the government should provide the good to the level at which the marginal social benefit of an additional good is no longer greater than the marginal cost
Socially Optimal Quantity of Pollution
the quantity of pollution that society would choose if all the costs and benefits of pollution were fully accounted for
Rival in Consumption
the same unit of the good cannot be consumed by more than one person at the same time
Non-excludable
the supplier cannot prevent consumption by people who do not pay for it
Excludable
the supplier of that good can prevent people who do not pay from consuming it
Public goods are provided through a variety of means
voluntary contributions - Private donations self-uninterested individuals or firms because those who produce them are able to make money in an indirect way - Broadcast TV deliberately made excludable and therefore subject to change - On-demand movies
Internalize the externality
when individuals take external costs or benefits into account