Economics Chapter 10: Externalities
To achieve the socially optimal output...
Government can internalize an externality by imposing a tax on the producer to reduce the equilibrium quantity to the socially desirable quantity
Internalizing the Externality
Involves altering incentives so that people take into account of the external effects of their action
Negative Externalities and Socially optimal level
The social cost is less than the supply curve. Less than the market equilibrium quantity
Positive Externalities and Socially optimal level
The social value is above the demand curve. optimal output level is more than the equilibrium quantity. social value exceeds private value of good
Externalities can cause
a market to be inefficient which thus fails to maximize total surplus
Social cost
for each unit produced, the social cost includes the private costs of the producer and the cost to those bystanders adversely affected
Command and Control Policy
forbids or requires certain behavior
Patent Laws
form of tech policy that gives the individual or firm with patent protection a property right over its intervention
Industrial Policy
government intervention in the economy that aims to promote technology enhancing industries
Market based policies
government uses taxes and subsidies to align private incentive with social efficiency- tradable pollution permits allow the voluntary transfer of the rights to pollute from one firm to another (market for these permits will eventually develop, firm can reduce pollution @ low cost and sell its permit to a firm that can reduce pollution @ high cost)
If a company emits pollution, the cost to society is
larger than the cost to the producers
Subsidies
primary method to internalizing a positive externality
The Coase Theorum
private economic actors can solve the problem of externalities among themselves. w/e the initial distribution of rights, the interested parties can always reach a bargain in which everyone better off & outcome efficient
Negative externalities lead markets to
produce a larger quantity than socially desireable
Positive externalities lead markets to
produce a smaller quantity than socially desirable
Why private solutions do not always work
sometimes transaction costs so high that private agreement is not possible, each party may try to hold out for the better deal, or # of interested parties is large and coordinating everyone is costly
Pigovian Tax
taxes enacted to correct the effects of a negative externality
Transaction Cost
the cost that parties incur in the process of agreeing to and following thru on a bargain
Externality
the uncompensated impact of one person's actions on the well-being of a bystander. arise when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect.
Public policy towards Externalities
when externalities are significant and private solutions not found: government intervention
Positive Externality
when the impact on a bystander is beneficial (immunizations, new tech research)
Negative Externality
when the impact on the bystander is adverse/bad (pollution, exhaust, a loud pet, smoking)