Externalities

What are some a ways a country protects its environment?

1) Environmental Standards 2) Emissions Tax - Pigouvian Taxes 3) Tradable Emissions Permits 4) Abatement Tech

What might cause people NOT to internalize externalities?

1) High cost of communication - pollution covers wide area and it's hard to reach out to everyone 2) High cost of making legally binding and timely agreements

Government actions for external benefits

1) Public provision 2) Private/public subsidies 3) Vouchers

Externality

A cost or a benefit that arises from production and that falls on someone other than the producer; or a cost or benefit that arises from consumption and that falls on someone other than the consumer.

True or False: An activity that generates a positive externality will always have a marginal private cost less than the marginal social cost. This is _____.

FALSE

Why are tradable permits preferred?

It leads to an ALLOCATION of pollution reduction EFFICIENTLY in the LEAST COSTLY WAY It provides an incentive to polluters to take the MSC of pollution into account

For plants that have older tech

It's costlier for them to reduce pollution so an additional unit of pollution is worth more to them

MSB =

MB + marginal external benefit

MSC =

MC + marginal external cost MSC = MC curve

Given the general agreement that pollution is undesirable and social welfare is increased by reducing pollution, what's the optimal level of pollution?

MSC=MSB

Are monopolies in goods with network externalities illegal?

Nope, they occur naturally

Problems with emissions taxes?

Not sure how high it should be set

Why does a market economy produce too much pollution without government intervention?

Quantity of pollution is greater than the socially optimal quantity which is where MSC=MSB This quantity is where MSB=0 and MSC is really big

How do tradable emissions permits work?

So each firm that pollutes has different costs of reducing pollution Polluters who value pollution more (older tech) will want to purchase permits from those who don't value it as much (new tech) Those with lowest cost of reducing pollution (new tech) will reduce their pollution the MOST while whose with highest cost of reducing pollution (old tech) will reduce their pollution the LEAST

MSB > MSC

When production is less than the equilibrium quantity - too little pollution produced

Pigouvian subsidy

a payment designed to encourage activities that yield external benefits ex) farmers - where MSB= MSC Find the difference between S and D at the socially optimal quantity

Emission tax

a tax that depends on amount of pollution a firm produces incentive to reduce emissions to social optimal quantity MC + tax = MSC

A good is subject to a network externality when

an increase in number of other people using the good increases its value to an individual

Marginal social benefit

benefit to society from an additional unit of pollution

Efficient rate of emissions occurs when

change in Social benefit=change in Social cost

Both emissions taxes and tradable emissions permits are

efficient cost-minimizing methods of pollution reduction

For the same amount of pollution emitted, an emissions tax is said to be more efficient than an environmental standard because all polluters:

emit pollution up to the point at which the marginal benefit of polluting is equal to the emissions tax.

Community requires sewage treatment plant to process raw sewage so it's safe to return to water to environment ... what does this show?

environmental standard

Coase theorem

even in the presence of externalities, an economy can always reach an efficient solution as long as transaction costs (opportunity costs) are sufficiently low, property rights well-defined and small number of parties involved

The result of the Coase theorem

forces people to internalize the externality - take into account external costs and benefits to produce an efficient outcome

Great energy transition

from heavy reliance on fossil fuels to heavy reliance on clean energy sources to revert climate change

Tradable emissions permits

licenses to emit limited quantities of pollutants that can be bought and sold by polluters

Climate change

man-made change in Earth's climate from the accumulation of greenhouse gases

If industry is unregulated and creates external cost...

market equilibrium is INEFFICIENT - too much good produced and there's deadweight loss in that triangle from MSC to MCto the efficient quantity

Network externalities are often a reason for...

natural monopolies

If drivers decide to make phone calls without considering costs imposed on others

number of phone calls made while driving will be more than socially optimal quantity

Private/public subsidies

payment that the government makes to private producers to cover part of the costs of production ex) student loan is a public subsidy

external benefits associated with production of batteries. Without government regulation, market will

price batteries BELOW MSB

Positive externality :)

production or consumption activity that creates an external BENEFIT ex) Education, flu vaccine

Negative externality :(

production or consumption activity that creates an external COST ex) pollution - those who decide how much pollution to create have no incentive to take into account the costs of pollution they impose on others

Socially optimal quantity of pollution

quantity of pollution society would choose if all the social costs and benefits were fully accounted for !!!!!MSB=MSC!!!

Positive Feedback (Bandwagon effect)

result of when a network externality arises if a lot of people use it, other people will want to use it too

Environmental Standards

rules established by a government to protect the environment by specifying actions by producers and consumers Ex) Clean Air Act of 1970 - authority to issue regulations that requires utilities, chemical plants and steel mills to limit pollution *not as efficient as emissions taxes*

Technology spillover

spreading of knowledge across individuals and firms

Pigouvian Tax

taxes designed to reduce external costs

Abatement tech

technology that reduces or prevents pollution "produce and pollute less"

Marginal social cost (MSC)

the additional cost imposed on SOCIETY as a whole by an additional unit of pollution

Public provision

the production of a good or service by a public authority that receives most of its revenue from the government

Vouchers

token that the government provides to households that can be used to buy specific goods or services

MSC > MSB

too much pollution is produced

What does the MSC curve look like

typically increasing - each additional unit of pollution emitted causes a greater level of damage than previous

What causes externalities?

when property rights are missing -legally established titles to the ownership, use and disposal of factors of production and goods and services that are enforceable in the courts

Network externality

when value of a good or service increases as the number of other people who also use the good or service increases ex) car