1Econ 101 M. SalemiEcon 101 M. SalemiExternalities ExamplesExternalities ExamplesSecond Midterm ExamSecond Midterm ExamNews News Externalities and Property Rights ReduxExternalities and Property Rights ReduxExamples of How Economics Contributes to Examples of How Economics Contributes to Efficient Remedies for Third Party EffectsEfficient Remedies for Third Party EffectsShould the U.S. use a carbon tax or a capShould the U.S. use a carbon tax or a cap--andand--trade system to lower COtrade system to lower CO22emissions?emissions?What Have We Learned?What Have We Learned?Econ 101 M. SalemiEcon 101 M. SalemiMidterm ExaminationMidterm ExaminationThe exam is The exam is Tuesday, November 3Tuesday, November 3in class.in class.It comprises 30It comprises 30--35 multiple choice questions.35 multiple choice questions.It covers material in lectures 10 and 12It covers material in lectures 10 and 12--18.18.The exam is The exam is ““closed books and notesclosed books and notes””and the and the honor code will be strictly enforced.honor code will be strictly enforced.Please bring a Scantron sheet and your UNC ID.Please bring a Scantron sheet and your UNC ID.Late comers will be barred.Late comers will be barred.You may not leave the room during the exam.You may not leave the room during the exam.Practice questions and the key for backPractice questions and the key for back--ofof--chapter chapter problems are posted on the web page.problems are posted on the web page.Exam AdvicePlease fill out your Scantron accurately.There is a one-course-point penalty for bubbling errors. There were about ten bubbling errors on the first midterm.Please start studying now. Most students find the second midterm more difficult than the first.News2Econ 101 M. SalemiEcon 101 M. SalemiReviewReviewExternalities Externalities andandProperty RightsProperty RightsEcon 101 M. SalemiEcon 101 M. SalemiWhat Are Externalities?What Are Externalities?Externalities are the costs (and sometimes Externalities are the costs (and sometimes benefits) that are not experienced directly benefits) that are not experienced directly by producers and consumers of goods.by producers and consumers of goods.Externalities Externalities ““spill overspill over””onto third parties.onto third parties.Externalities are generally negativeExternalities are generally negative……but but sometimes positive.sometimes positive.Econ 101 M. SalemiEcon 101 M. SalemiExternalities Interfere with Externalities Interfere with Efficient Allocation of Resources.Efficient Allocation of Resources.For most goods, the total social cost of For most goods, the total social cost of production and consumption are reflected production and consumption are reflected in the price of the good. in the price of the good. For goods with third party effects, the total For goods with third party effects, the total social cost and benefit of production and social cost and benefit of production and consumption are not wholly reflected in consumption are not wholly reflected in the price of the good.the price of the good.Econ 101 M. SalemiEcon 101 M. SalemiExternalities Interfere with Externalities Interfere with Efficient Allocation of Resources.Efficient Allocation of Resources.When negative externalities are associated When negative externalities are associated with production or consumption of a good, with production or consumption of a good, too much too much of the good is produced and of the good is produced and consumed.consumed.When positive externalities are associated When positive externalities are associated with production or consumption of a good, with production or consumption of a good, too little too little of the good is produced and of the good is produced and consumed.consumed.3Econ 101 M. SalemiEcon 101 M. SalemiRonald Coase Explains The Ronald Coase Explains The Connection between Externalities Connection between Externalities And Property RightsAnd Property RightsIf bargaining is not costly and If bargaining is not costly and If property rights are secureIf property rights are secureThenThenAgents can bargain over externalities Agents can bargain over externalities and achieve an efficient outcomeand achieve an efficient outcome..Econ 101 M. SalemiEcon 101 M. SalemiUse Your Clickers To Answer Use Your Clickers To Answer The Following The Following Graded Question.Graded Question.Pollution DecisionPollution DecisionValue of the MillValue of the MillValue of the FisheryValue of the FisheryHigh DischargeHigh Discharge$5000$5000$2000$2000Low DischargeLow Discharge$1000$1000$3000$3000If the Fishery has the right to block the mill from a high rate If the Fishery has the right to block the mill from a high rate of discharge of pollution thenof discharge of pollution then……A.A.The Fishery will prefer to exercise its right and keep The Fishery will prefer to exercise its right and keep pollution low.pollution low.B.B.The Fishery will achieve the social optimum by keeping The Fishery will achieve the social optimum by keeping pollution low.pollution low.C.C.The Mill will pay the Fishery over $4000 for the right to The Mill will pay the Fishery over $4000 for the right to pollute. Fishery will go out of business because of pollute. Fishery will go out of business because of pollution.pollution.D.D.The Mill will achieve the social optimum by buying the The Mill will achieve the social optimum by buying the right to pollute from the Fishery.right to pollute from the Fishery.Econ 101 M. SalemiEcon 101 M. SalemiMarkets and Third Party EffectsMarkets and Third Party EffectsUnder the Clean Air Act Amendments of 1990, the U.S. Environmental Protection Agency (EPA) established the Acid-rain Abatement Program that authorized the creation of a sulfur dioxide (SO2) allowance trading system. An air pollution allowance trading program introduces market forces into pollution control, harnessing the incentives of the free market to reduce pollution.4Econ 101 M. SalemiEcon 101 M. SalemiEcon 101 M. SalemiEcon 101 M. SalemiMarkets and Third Party EffectsMarkets and Third Party EffectsThe total amount of pollution to be allowed from certain similar sources within the designated area for a specified period is determined based on local clean air standards and the goals of the emission reduction program. The total is divided into allowance units, which are auctioned off to the sources. “Allowances” are in units of pollutant emitted, such that a polluter will