Main topics Chapter 18 Externalities Externalities externality occurs if someone s consumption or production activities hurt or help others outside a market well being of a consumer or production capability of a firm are affected directly by actions of other consumers or firms rather than indirectly through changes in prices Positive and negative externalities externalities may either help or harm others externality that harms someone is a negative externality positive externality benefits others action may confer positive externalities on some people and negative externalities on others wind chimes though it s hard to imagine the positive ones 1 externalities 2 inefficiency of competition with externalities 3 market structure and externalities 4 allocating property rights to reduce externalities 5 common property 6 public goods Examples firm whose production process lets off fumes that harm its neighbors is creating an externality for which there is no market firm is not causing an externality when it harms a rival by selling extra output that lowers market price Los Angeles air an atmospheric scientist reports that cleaning up LA air over last decade helped people breathe caused radiation levels to increase more rapidly than they would have risen if air had remained dirty 1 Michael Jordan Positive externality Jordan s presence raised 1991 92 regular season away games ticket revenues 2 5 million local TV advertising revenues 2 4 million positive externality extra revenues went to home team rather than to Bulls Inefficiency of competition with externalities competitive firms and consumers do not have to pay for harms of their negative externalities so they produce excessive pollution Private vs social costs private cost cost to firm of production only not including externalities direct costs of labor energy and wood pulp but not indirect costs of harm from gunk social cost private cost plus cost of harms from externalities Additional externalities Jordan s presence increased national earnings TV advertising 6 6 million regular season 13 9 million playoffs NBA Properties clothing and videos by 15 1 million shared equally by all teams so externality total value of Jordan s positive externalities was 40 3 million Assumptions competitive paper market firms produce paper and gunk by products air and water pollution that harm people who live near paper mills each ton of paper produced increases the amount of gunk by 1 unit only way to decrease volume of gunk is to reduce the amount of paper manufactured paper firms do not have to pay for harm from pollution they cause Supply and demand analysis competitive market produces excessive pollution because firms private costs social costs maximizes welfare sum of CS and social PS based on the social marginal cost curve social optimum welfare is maximized where price equals social MC optimal tradeoff between value of production and pollution harm 2 Figure 18 1 Welfare Effects of Pollution in a Competitive Market Reducing externalities Price of paper p per ton 450 MC s MC p MC g A ps 282 B p c 240 198 F 84 es E CD ec H MC p G competitive markets produce excessive negative externalities hence government intervention may benefit society MC p MC g MC g 30 Demand 0 Qs 84 Q c 105 225 Q Tons of paper per day G Units of gunk per day Government expenditures expenditures on environmental protection as a percentage of GDP range between a 0 2 to 1 0 2 Italy 0 4 Portugal United Kingdom 0 6 United States Spain 0 7 Sweden 0 8 Germany Switzerland 1 0 Austria Denmark and Japan world s poorest countries spend little if anything on pollution control Emissions relative to economic output developing countries China emitted 2 095 metric tons of carbon per million dollars of GDP Soviet Union 1 517 India 602 Mexico 586 developed countries United States 279 Great Britain 216 Japan 101 Figure 18 2 Taxes to Control Pollution Government intervention direct approach emissions tax fee effluent charge indirect approach emissions standard quantity restrictions on outputs or inputs because output and pollution move together regulating either works Price of paper p per ton 450 MC s MC p t Q MC p es p s 282 MC p 84 MC p 198 MC g MC g 84 Demand 0 Q s 84 225 Q Tons of paper per day G Units of gunk per day 3 Optimal regulation unfortunately government usually does not know enough to regulate optimally government needs to know marginal social cost curve Enforcement even if government knows enough to set optimal regulation it must enforce regulation to achieve social optimum U S Environmental Protection Agency EPA smog standards violated in 33 metropolitan areas demand for paper curve including Baltimore Boston Chicago Houston Los how pollution varies with output http www epa gov enviro zipcode html http www scorecard org http www formyworld com Cost benefit analysis Angeles Milwaukee New York and Philadelphia Figure 18 3 Cost Benefit Analysis of Pollution a Cost and Benefit Benefit Cost 4 000 Cost less paper Benefit less gunk 2 000 instead of using the supply and demand analysis to show that competitive market produces too much pollution use a cost benefit diagram welfare is maximized by reducing output and pollution until the marginal benefit from less pollution equals the marginal cost of less output 0 105 ozone is a major air pollutant it is formed in the atmosphere through a chemical reaction between organic gases and nitrogen oxides in sunlight 84 63 b Marginal Cost and Marginal Benefit Marginal benefit Marginal cost 105 Q Tons of paper per day G Units of gunk per day MC 84 MB 0 105 Emission standards for ozone Maximum net benefit 84 Q Tons of paper per day G Units of gunk per day Standards Clean Air Act of 1990 sets national airquality standards for major pollutants 0 12 parts per million ppm California Air Resources Board CARB has an even tighter standard 0 09 ppm 4 Costs and benefits cost of reducing ozone greater expenses of manufacturing driving benefit better health in urban areas increased agricultural yields in rural areas consequently optimal level differs in urban and rural areas Rural areas is CA standard too strict for an agricultural area according to the CARB crop losses due to high ozone levels range from 8 4 for alfalfa hay 32 for oranges CARB claims production yields fall for ozonesensitive crops such as beans cotton grapes lemons and oranges even at ozone levels as low as 0 09 Los Angeles benefits of reducing ozone level costs over past several decades
View Full Document
Unlocking...