Economics 1: Principles of microeconomicsWednesday, May 16, 2012Lecture 13Review:-ExternalitiesPreview:-Solutions when externalities exist- Environmental Standards (Command and Control)- Tax; subsidy (internalize cost of the benefit)- Tradable Permitso Coase TheoremEnvironmental Standards (Command and Control)Ex. Pollution Plant A vs. Plant B Quantity of Pollution Costmarginal cost as recognized by the firm300150300 600Environmental Standard--> doesn't matter if it costs a lotPlan B costs a lot more than Plan A--> imposing amount of outcome600300200200(Plant A)cut back by400400(Plant B)cut back by 200 unitsImpost tax equal to amount of externality--> harder to implement but has an overall lower cost to societyPigouvian TaxEconomics 1: Principles of microeconomicsWednesday, May 16, 2012Lecture 13Tradable Permits:Example:Crowded bus coming home from rush hour and one person decides to pull out a cigar.--> 6 people next to the smoker tell her to stop smoking--> she asks why?She values smoking at $3.00The 6 people value clean air at $1.00/person1. Environmental Standard: Puts up a NO SMOKING sign on the bus2. Trading propertiesCase 1:Property rights are rewarded to smokers Smoking costs total $6.00--> 6 will pay up to $6.00 and she won't smokeCase 2:Property rights go to nonsmokers--> Smokers will pay maximum $3.00 Won't get to smoke--> Minimum needs $6.00Example 2:Smoker now values smoking at $6.00The 6 people around her value clean air at $0.50/personCase 1:Economics 1: Principles of microeconomicsWednesday, May 16, 2012Lecture 13Give rights to the smoker---> will smokeSmoker is wealthierCase 2:Give rights to nonsmoker---> will smokeNonsmokers are wealthierRegardless who rights are given to, still able to smoke.Doesn't matter who is given rights initially; will get same amount of pollutionPractice Problems:- How do we measure the efficient amount of pollution?- How do we allocated the permits?- Monitoring- Tradable permits work best for geographically dispersal pollution- Keep up with
View Full Document