Chapter 16: Externalities

Policies Toward Pollution

1) environmental standards 2) emissions tax 3) Pigouvian taxes 4) Tradable emissions permits

positive feedback

A good is subject to positive feedback when success breeds greater success and failure breeds further failure. So success breeds greater success and failure breeds failure: the good with the larger network will eventually dominate, and rival goods will disappear.

environmental standards

Environmental standards are rules that protect the environment by specifying actions by producers and consumers. Governments often deal with pollution by imposing environmental standards, a method, economists argue, that is usually an inefficient way to reduce pollution

externalities

External costs and benefits

"how much" decisions always involve

comparing the marginal benefit from an additional unit of something with the marginal cost of that additional unit. (The same is true for pollution)

producer surplus

is the area below the supply curve and above the price line (i.e. that horizontal "emissions tax" or permit price line)

transaction costs

the costs to individuals of making a deal

a network externality exists when...

the value of a good or service is greater when a large number of other people also use the good or service

Two efficient (cost-minimizing) methods for reducing pollution are

1)emissions taxes, a form of Pigouvian tax, and 2) tradable emissions permits. The optimal Pigouvian tax on pollution is equal to its marginal social cost at the socially optimal quantity of pollution. These methods also provide incentives for the creation and adoption of production technologies that cause less pollution.

Pigouvian subsidy

A Pigouvian subsidy is a payment designed to encourage activities that yield external benefits.

technology spillover

A technology spillover is an external benefit that results when knowledge spreads among individuals and firms.

Coase theorem

According to the Coase theorem, even in the presence of externalities an economy can always reach an efficient solution as long as transaction costs—the costs to individuals of making a deal—are sufficiently low.

emissions tax

An emissions tax is a tax that depends on the amount of pollution a firm produces. (a tax imposed on an activity will reduce the level of that activity. ) (an emissions tax equal to the marginal social cost at the socially optimal quantity of pollution induces polluters to internalize the externality—to take into account the true cost to society of their actions.)

external benefit

An external benefit is a benefit that an individual or firm confers on others without receiving compensation. Jointly known as "positive externalities" (like when you get a flu shot)

external cost

An external cost is an uncompensated cost that an individual or firm imposes on others. Jointly known as "negative externalities" (like environmental cost of pollution)

Pigouvian taxes.

Taxes designed to reduce external costs are known as Pigouvian taxes. The optimal Pigouvian tax on pollution is equal to its marginal social cost at the socially optimal quantity of pollution.

marginal social benefit of pollution

The marginal social benefit of pollution is the additional gain to society as a whole from an additional unit of pollution. ( is the goods and services that could be had by society if it tolerated another unit of pollution.)

marginal social cost of pollution

The marginal social cost of pollution is the additional cost imposed on society as a whole by an additional unit of pollution.

why don't private parties always internalize externalities?

The problem is transaction costs in one form or another that prevent an efficient outcome. The high cost of communication. Suppose a power plant emits pollution that covers a wide area. The cost of communicating with the many people affected will be very high. The high cost of making legally binding and timely agreements. What if some landowners band together and pay a driller to reduce groundwater pollution. It can be very expensive to make an effective agreement, requiring lawyers, groundwater tests, engineers, and others.

Tradable emissions permits

Tradable emissions permits are licenses to emit limited quantities of pollutants that can be bought and sold by polluters.

internalize the externality

When individuals take external costs or benefits into account, they internalize the externality.

why will a market economy, left to itself, produce more pollution than it should

because polluters take only their benefit from polluting into account, not the costs imposed on others. (While pollution yields both benefits and costs to society, in a market economy without government intervention too much pollution will be produced. In that case it is polluters alone—owners of power plants or gas-drilling companies, for example—who decide how much pollution is created. And they have no incentive to take into account the cost that pollution inflicts on others.)

Markets with network externalities tend to be

monopolies. They are especially challenging for antitrust regulators because it can be hard to differentiate between the natural progression of the network externality and illegal monopolization efforts by producers.

Communications, transportation, and high-technology goods are frequently subject to...

network externalities, which arise when the value of the good to an individual is greater when a large number of people use the good.

socially optimal quantity of pollution

the quantity at which the marginal social cost of pollution is equal to the marginal social benefit of pollution (The socially optimal quantity of pollution is the quantity of pollution that society would choose if all the costs and benefits of pollution were fully accounted for.)

MSB curve represents

the resources made available by tolerating one more unit of pollution (If the polluter increases his emission of pollution by moving down the MSB curve from $200 to $100, that gain of $100 comes from using less-expensive but higher-emission production techniques. Remember, he suffers none of the costs of doing this—only others do... he will only stop when the MSB is zero, because, at that point, he gains nothing by using yet cheaper and dirtier production techniques and emitting more pollution.)

an outcome is inefficient if

there is a mutually beneficial trade that is being missed (marginal social cost exceeds marginal social benefit)

In regards to positive feedback, producers have an incentive

to take aggressive action in the early stages of the market to increase the size of their network.

Because poor countries have a higher opportunity cost of resources spent on reducing pollution than richer countries, they...

tolerate higher levels of pollution

permits, like licenses, are

tradable