Externalities and Public Goods: Prepared by
Externalities and Public Goods: Prepared by
Externalities and Public Goods: Prepared by
18
Externalities
and
Public Goods
Prepared by:
Fernando & Yvonn Quijano
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CHAPTER 18 OUTLINE
18.1 Externalities
18.2 Ways of Correcting Market Failure
18.3 Stock Externalities
Chapter 18 Externalities and Public Goods
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18.1 EXTERNALITIES
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18.1 EXTERNALITIES
External Cost
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18.1 EXTERNALITIES
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18.1 EXTERNALITIES
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18.1 EXTERNALITIES
Figure 18.2
External Benefits
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18.1 EXTERNALITIES
Figure 18.3
dioxide concentration
equates the marginal
abatement cost to the
marginal external cost.
Here the marginal
abatement cost curve is
a series of steps, each
representing the use of a
different abatement
technology.
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18.2 WAYS OF CORRECTING MARKET FAILURE
Figure 18.4
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18.2 WAYS OF CORRECTING MARKET FAILURE
An Emissions Standard
● emissions standard Legal limit on the amount of
pollutants that a firm can emit.
Figure 18.5
Standards and Fees
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18.2 WAYS OF CORRECTING MARKET FAILURE
An Emissions Fee
● emissions fee Charge levied on each unit of a firm's
emissions.
Standards versus Fees
Figure 18.6
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18.2 WAYS OF CORRECTING MARKET FAILURE
Tradeable Emissions Permits
● tradeable emissions permits System of marketable
permits, allocated among firms, specifying the maximum
level of emissions that can be generated.
Marketable emissions permits create a market for externalities. This
market approach is appealing because it combines some of the
Chapter 18 Externalities and Public Goods
Figure 18.8
Price of Tradeable Emissions Permits
Chapter 18 Externalities and Public Goods
Recycling
Figure 18.9
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18.2 WAYS OF CORRECTING MARKET FAILURE
Recycling
Figure 18.9
Refundable Deposits
Figure 18.10
Refundable Deposits
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18.2 WAYS OF CORRECTING MARKET FAILURE
Refundable Deposits
Figure 18.10
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18.2 WAYS OF CORRECTING MARKET FAILURE
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18.3 STOCK EXTERNALITIES
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18.3 STOCK EXTERNALITIES
Stock Buildup and Its Impact
S1 E1
In general, the stock in any year t is given by the emissions generated
that year plus the nondissipated stock from the previous year:
St Et (1 )St 1
If emissions are at a constant annual rate E, then after N years, the
stock of pollutant will be
S N E[1 (1 ) (1 )2 (1 ) N 1]
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18.3 STOCK EXTERNALITIES
Stock Buildup and Its Impact
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18.3 STOCK EXTERNALITIES
Stock Buildup and Its Impact
To determine whether a policy of zero emissions makes sense,
we must compare the present value of the annual cost of $1.5 billion
with the present value of the annual benefit resulting from a reduced
stock of pollutant.
(1.5 .198) (1.5 .296) (1.5 4.337)
NPV (1.5 .1)
1R (1 R) 2 (1 R)99
Chapter 18 Externalities and Public Goods
Table 18.2 shows the NPV as a function of the discount rate. It also shows how
the NPV of a “zero emissions” policy depends on the dissipation rate, δ. If δ is
lower, the accumulated stock of pollutant will reach higher levels and cause more
economic damage, so the future benefits of reducing emissions will be greater.
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18.3 STOCK EXTERNALITIES
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18.3 STOCK EXTERNALITIES
or GHGs.
The problem is that the costs of reducing GHG emissions would occur
today but the benefits from reduced emissions would be realized only in
some 50 or more years.
Does this emissions-reduction policy make sense? To answer that
question, we must calculate the present value of the flow of net benefits,
which depends critically on the discount rate. Economists disagree about
what rate to use, and as a result, they disagree about what should be done
about global warming
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18.3 STOCK EXTERNALITIES
Chapter 18 Externalities and Public Goods
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18.4 EXTERNALITIES AND PROPERTY RIGHTS
Property Rights
● property rights Legal rules stating what people or
firms may do with their property.
when the externality affects relatively few parties and when property
rights are well specified.
The efficient solution maximizes the joint profit of the factory and the
fishermen. Maximization occurs when the factory installs a filter and
the fishermen do not build a treatment plant.
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18.4 EXTERNALITIES AND PROPERTY RIGHTS
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18.4 EXTERNALITIES AND PROPERTY RIGHTS
Costly Bargaining—The Role of Strategic Behavior
Bargaining can be time-consuming and costly, especially when
property rights are not clearly specified.
Bargaining can break down even when communication and monitoring
are costless if both parties believe they can obtain larger gains.
Chapter 18 Externalities and Public Goods
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18.4 EXTERNALITIES AND PROPERTY RIGHTS
For many years, garbage spilling from waterfront trash facilities along
New York harbor had adversely affected the quality of water along the
New Jersey shore and occasionally littered the beaches. New Jersey
wanted cleaner beaches, not simply the recovery of damages. And
New York wanted to be able to operate its trash facility.
Consequently, there was room for mutually beneficial exchange. After
two weeks of negotiations, New York and New Jersey reached a
settlement.
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18.5 COMMON PROPERTY RESOURCES
● common property resource Resource to which anyone
has free access.
Figure 18.11
Common Property Resources
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18.5 COMMON PROPERTY RESOURCES
Figure 18.12
Crawfish as a Common Property Resource
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18.6 PUBLIC GOODS
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18.6 PUBLIC GOODS
Efficiency and Public Goods
Figure 18.13
benefit of consumption,
given by the demand
curve D, is determined by
vertically summing the
individual demand curves
for the good, D1 and D2.
At the efficient level of
output, the demand and
the marginal cost curves
intersect.
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18.6 PUBLIC GOODS
Public Goods and Market Failure
● free rider Consumer or producer who does not pay for a
nonexclusive good in the expectation that others will.
Figure 18.14
Chapter 18 Externalities and Public Goods
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18.7 PRIVATE PREFERENCES FOR PUBLIC GOODS
Figure 18.15
Determining the Level of
Educational Spending
citizens.
Curves W1, W2, and W3 represent
their willingness to pay, and curve
AW represents the aggregate
willingness to pay.
The efficient level of spending is
$1200 per pupil. The level of
spending actually provided is the
level demanded by the median
voter. In this particular case, the
median voter's preference (given
by the peak of the W2 curve) is
also the efficient level.
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