HO5e-Ch05---Microeconomics

1、R. GLENNHUBBARD,ANTHONY PATRICKOBRIEN,FIFTH EDITION, 2015 Pearson Education, Inc.,Externalities, Environmental Policy, and Public Goods,What Is the “Best” Level of Pollution?,Is there a way to know what is the optimal level of pollution for a society? “No pollution” may be good for the environment,

2、but is probably not good for peoplemost modern conveniences in some way result in pollution. But unrestrained pollution is probably not optimal either. Economics offers some ideas for how to decide on how much pollution to allow.,Externalities and Economic Efficiency,5.1,Identify examples of positiv

3、e and negative externalities and use graphs to show how externalities affect economic efficiency.,Pollution is an Externality,No one sets out to create pollution; pollution is an unintended by-product of various activities. Pollution would not be a problem if pollution only affected the person who c

4、reated it; people would create pollution only until its marginal cost equaled its marginal benefit. But pollution is an example of an externality: a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service. Think of an externality like a

5、 side-effect.,Electricity Production,Electricity production is an incredibly important industry for a modern economy. Consider the market for electricity. It consists of: Sellers, who face increasing marginal costs to produce electricity Buyers, who face decreasing marginal benefits of additional el

6、ectricity The actions of these groups generate market supply and demand curves for electricity.,Cost of Electricity Production,When firms produce electricity, they have costs of production: Buildings Equipment Fuel Labor, etc. Those firms make their decisions about how much to produce based on these

7、 private costs. But the social cost is higher: the cost to society includes both the private cost and the external cost of the pollution.,Externalities in the Electricity Production Market,Supply curve S1 represents just the marginal private cost that the electricity producer has to pay. Supply curv

8、e S2 represents the marginal social cost, which includes the costs to those affected by pollution. The optimal level of production for society is QEfficient; at this quantity, the marginal cost to society is just equal to the marginal benefit.,The effect of pollution on economic efficiency,Figure 5.

9、1,Inefficiency Due to Negative Externalities,However the market equilibrium results from the decisions of producers, who see their cost of production given by S1. Price (PMarket) is “too low” and quantity (QMarket) is “too high”: the cost to society of the additional electricity exceeds its benefit

10、to society. Deadweight loss results. When there is a negative externality in producing a good or service, too much of the good or service will be produced at market equilibrium.,The effect of pollution on economic efficiency,Figure 5.1,Externalities,Pollution is an example of a negative externality

11、in production. Negative externalities might result from consumption. Example: cigarette smoke Externalities might also be positive, with social benefits exceeding private benefits. Example: college education Private benefit: the benefit received by the consumer of a good or service. Social benefit:

12、The total benefit from consuming a good or service including both the private benefit and any external benefit. Positive externalities result in underproduction relative to efficiency.,Externalities in the College Education Market,College educations have positive externalities. The marginal social b

13、enefit from a college education is greater than the marginal private benefit to college students. Because only the marginal private benefit is represented in the market demand curve D1, the quantity of college educations produced, QMarket, is too low.,The effect of a positive externality on economic

14、 efficiency,Figure 5.2,When there is a positive externality in consuming a good or service, too little of the good or service will be produced at market equilibrium.,Externalities and Market Failure,If there are negative or positive externalities, the market equilibrium will not result in the effici

15、ent quantity being produced. There will be deadweight loss. This is an example of market failure: a situation in which the market fails to produce the efficient level of output. The larger the externality, the greater is likely to be the size of the deadweight lossthe extent of the market failure.,W

16、hat Causes Externalities?,Externalities arise because of incomplete property rights, or from the difficulty of enforcing property rights in certain situations. Suppose a farmer and a paper mill share a stream. If no-one owns the stream, the paper mill will discharge waste into the stream, making it

17、unusable for the farmer. If the farmer owns the stream, he can Prevent the mill from discharging into the stream, or Allow the mill to discharge for a fee, if that is beneficial to him. Either way, good property rights avoid the market failure. Property rights: The rights individuals or businesses h

18、ave to the exclusive use of their property, including the right to buy or sell it.,Private Solutions to Externalities: The Coase Theorem,5.2,Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality.,Is “Zero Pollution” Efficient?,Th

19、e previous slide suggested that avoiding pollution altogether is the best solution. But what if the paper mill saves a lot of money by discharging into the stream, and the farmer has an alternative water supply? Much of the time, a non-zero amount of pollution is optimal, determined by where the mar

20、ginal benefit from pollution is just equal to the marginal cost of pollution. Or equivalently, the marginal cost of pollution reduction equals the marginal benefit from pollution reduction.,An Efficient Amount of Pollution,This graph shows pollution reduction, which has both costs and benefits. 10 u

21、nits of pollution reduction is “too much”; the cost of the last unit exceeds the benefit. 7 units of pollution reduction is “too little”; the benefit of the next unit exceeds the cost. 8.5 units is efficient; the marginal cost just equals the marginal benefit.,The marginal benefit from pollution red

22、uction should equal the marginal cost,Figure 5.3,The Net Benefit of Changing to the Efficient Level,Increasing the reduction in sulfur dioxide emissions from 7.0 million tons to 8.5 million tons results in total benefits equal to the sum of the areas A and B under the marginal benefits curve. The to

23、tal cost of this decrease in pollution is equal to the area B under the marginal cost curve. The total benefits are greater than the total costs by an amount equal to the area of triangle A.,The benefits of reducing pollution to the optimal level are greater than the costs,Figure 5.4,Can Private Par

24、ties Achieve the Efficient Level?,In principle, private parties could achieve the efficient level of pollution. People feeling the cost of the additional pollution (A+B) could pay polluters an amount equal to B; then polluters would choose not to pollute. But if the benefits of pollution reduction a

25、re felt diffusely (by many widespread people), achieving this outcome is difficultwe say the transaction costs are too high.,The benefits of reducing pollution to the optimal level are greater than the costs,Figure 5.4,The Coase Theorem,Nobel laureate Ronald Coase argued that private parties could s

26、olve the externality problem through private bargaining, provided Property rights are assigned and enforceable, and Transaction costs are low. Transaction costs: The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.

27、The Coase Theorem also requires that parties have full information about the costs and benefits involved.,The Coase Theorem and Property Rights,Perhaps Coases most important observation was that it did not matter to whom property rights were assigned. In the example of the paper mill and the farmer,

28、 we said that if the farmer had enforceable property rights over the stream, the externality problem could be resolved. But the same is true if the paper mill owns the stream! Can you explain why?,The Birds Apples and the Bees,There are mutual positive externalities in apple-growing and beekeeping.

29、This suggests both will be underprovided. But apple-growers and beekeepers have developed private solutions to this:,Beekeepers along the West Coast rent their hives out to orchardists in “pollination contracts,” moving them to where they are needed at different times of the year.,Government Policie

30、s to Deal with Externalities,5.3,Analyze government policies to achieve economic efficiency in a market with an externality.,When Can Two Wrongs Make a Right?,In chapter 4, we learned that taxes caused inefficiency (deadweight loss) by moving the level of production away from the efficient level. In

31、 this chapter, externalities cause inefficiency for the same reason. A tax of just the right size could cause these two effects to cancel out, returning us to the efficient level of production.,Corrective Taxes for Negative Externalities,Utilities do not bear the cost of pollution, so they produce t

32、oo much. If the government imposes a tax equal to the cost of the pollution, the utilities will internalize the externality. The supply curve will shift up, from S1 to S2. The market equilibrium quantity falls to the economically efficient level.,When there is a negative externality, a tax can lead

33、to the efficient level of output,Figure 5.5,Effect of the Corrective Taxes,The price of electricity will rise from PMarket, which does not include the cost of acid rain, to PEfficient, which does include the cost. Consumers pay the price PEfficient, while producers receive a price P, which is equal

34、to PEfficient minus the amount of the tax.,When there is a negative externality, a tax can lead to the efficient level of output,Figure 5.5,Can Taxes “Solve” Positive Externalities Too?,Taxes worked to solve the problem of negative externalities because: Negative externalities caused too much to be

35、produced, while Taxes reduced the amount of output. When there are positive externalities, too little will be produced. Taxes wont work; but subsidies might. Subsidy: An amount paid to producers or consumers to encourage the production or consumption of a good.,Corrective Subsidies for Positive Exte

36、rnalities,Individuals make decisions about whether or not to “consume” a college education, with a resulting market price and quantity. But what if there are positive externalities to a college education? It is good for us all if other people are smart and make good decisions. This is an argument fo

37、r a subsidy in the market for college education.,When there is a positive externality, a subsidy can bring about the efficient level of output,Figure 5.6,Effect of the Corrective Subsidies,The subsidy will cause the demand curve to shift up, from D1 to D2. The market equilibrium quantity will shift

38、from QMarket to QEfficient, the economically efficient equilibrium quantity. Producers receive the price PEfficient, while consumers pay a price P, which is equal to PEfficient minus the amount of the subsidy.,When there is a positive externality, a subsidy can bring about the efficient level of out

39、put,Figure 5.6,Corrective Taxes and Subsidies,The taxes and subsidies seen in the last few slides “correct” the externality problem. They are known as Pigovian taxes and subsidies, after the English economist Arthur Cecil Pigou, who first demonstrated the use of government taxes and subsidies in bri

40、nging about an efficient level of output in the presence of externalities. Pigovian taxes are especially popular with economists, because they increase efficiency while bringing in tax revenue; then (in theory) this allows inefficiency-causing taxes in other markets to be reduced, a double dividend

41、of taxation.,Should We Tax Cigarettes and Soda?,The consumption of cigarettes and soda are thought to have negative externalities. Why? Both cigarettes and soda have negative health consequences. This by itself is not sufficient to be a negative externality But peoples medical expenses are shared wi

42、th others, either via public or private health insurance. Therefore we expect there to be too much consumption of cigarettes and soda, and they are candidates for Pigovian taxes. In general, cigarettes are taxed much more heavily than soda. Is this appropriate?,Should We Tax Cigarettes and Soda?cont

43、.,Alternatives to Taxation for Solving Externalities,The traditional solution to the externality problem is command-and-control: an approach that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit, or requiring firms to install specific pollutio

44、n-control devices. Example: Requiring car manufacturers to equip cars with catalytic converters. Problem: What if firms have very different costs of reducing pollution? It may not be efficient for them to reduce pollution by the same amount.,Two Car Manufacturers,Suppose Ford can reduce pollution in

45、 its cars very cheaply, while GM has very high costs of reducing pollution. If we want to achieve a particular level of pollution-reduction, it would be efficient to ask Ford to reduce pollution more than GM. But this doesnt seem fair to Ford; why should GM be held to a lesser standard? The efficien

46、t solution has Ford perform more pollution reduction, but have GM compensate Ford; both companies can be made better off, compared with requiring both to reduce pollution by a moderate amount, while keeping the amount of pollution reduction the same.,Tradable Emissions Permits,This is the concept be

47、hind tradable emissions permits, also known as cap-and-trade: The government establishes an allowable amount of emissions. Emissions permits are distributed. Firms can trade emissions permits. Firms with high costs of reducing pollution will buy permits form firms with low costs of reducing pollutio

48、n, ensuring that pollution is reduced at the lowest possible cost. Hence the market is used to achieve efficient pollution reduction.,The Sulfur Dioxide Cap-and-Trade System,In 1990, Congress enacted a cap-and-trade system for sulfur dioxide emissions. Improvements in pollution reduction technology

49、resulted, with the cost of compliance ending up almost 90% less than firm initially estimated. This program was very effective, with benefits at least 25 times the cost of implementing the program. However by 2013, the program had effectively ended. Why? Further emissions reductions were needed; Pre

50、sident Bush attempted to lower the cap, but Congress resisted. As a result, the EPA decided to return to a command-and-control approach in order to achieve the reductions. While cap-and-trade appears to be very effective, any policy needs political backing to have a chance at success.,Criticisms of

51、Cap-and-Trade,Environmentalists object to cap-and-trade as it gives firms “l(fā)icenses to pollute.” But pollution has a benefit: it allows cheap production. Every production decision uses up some scarce resource: time, natural resources, clean air, etc. In this sense, paying for using the clean air see

52、ms appropriate. A more serious concern is that cap-and-trade may produce hot-spots, locations where a lot of pollution takes place. This would be the case if the firms with high costs of pollution-reduction were geographically close. Do you think this is likely?,Why has Cap-and-Trade Lost Its Popula

53、rity?,Cap-and-trade has lost some of its popularity recently. Why? Cap-and-trade alters who pays for pollution: When pollution is unregulated, all consumers bear the consequences of pollution. When cap-and-trade is enacted, the cost of pollution is borne directly by firms. Polluting firms tend to be

54、 able to organize better lobbying efforts, because consumers feel the cost of pollution diffusely. This illustrates the classic special-interest problem in politics: small groups are better able to organize than large groups, even when the large groups might benefit a lot from organizing.,Four Categ

55、ories of Goods,5.4,Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources.,Attributes of Goods and Services,We have seen that markets are better at providing the efficient le

56、vel of some goods and services than others. This is related to some important attributes of the goods and services: whether their consumption is rival and/or excludable. Rivalry: The situation that occurs when one persons consuming a unit of a good means no one else can consume it. Excludability: Th

57、e situation in which anyone who does not pay for a good cannot consume it.,The Four Categories of Goods,Four categories of goods,Figure 5.7,Efficient Provision of the Categories of Goods,Markets tend to be good at providing efficient levels of private goods. Why? The person making decisions about ho

58、w much to purchase tends to be the only one benefiting from the good, so only their preferences matter. Markets are not so good at providing efficient levels of the other types of goods. Why? People can free-ride on public goods, enjoying the benefits from them without paying for them. People have l

59、ittle incentive to conserve common resources, leading them to be over-consumed. Profit-maximization tends to lead too many people to be excluded from quasi-public goods.,Constructing Market Demand CurvesPrivate Goods,The market demand curve for private goods is determined by adding horizontally the

60、quantity of the good demanded at each price by each consumer. In panel (a), Jill demands 2 hamburgers when the price is $4.00, and in panel (b), Joe demands 4 hamburgers when the price is $4.00. So, a quantity of 6 hamburgers and a price of $4.00 is a point on the market demand curve in panel (c).,C