ECON 201 1st Edition Lecture 17Outline of Last Lecture I. Efficient Marketsa. Definition of market failureb. Definition of market powerII. Externalitiesa. Definition of externalityIII. Negative Externalitiesa. Definition of negative externalityIV. Internalizing the ExternalityV. Positive Externalitiesa. Definition of positive externalityb. Definition of social valuec. Definition of private valued. Definition of external benefitVI. Summary of Effects of ExternalitiesOutline of Current Lecture I. Public Policies toward Externalitiesa. Definition of command-and-control policyb. Definition of market-based policyc. Definition of corrective taxII. Comparing and Contrasting the PoliciesIII. Private Solutions to Externalitiesa. Definition of Coase theoremIV. Why Private Solutions Do Not Always WorkV. Povertya. Definition of povertyb. Definition of poverty linec. Definition of poverty rateCurrent LectureI. Public Policies toward ExternalitiesThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.There are two types of public policies that are used to internalize externalities: command-and-control policies and market-based policies. Command-and-control policies regulate behavior directly on the market by limiting a negative externality (i.e. the amount of pollution emitted). They also have technology requirements for businesses. Market-based policies provide incentives to private decision-makers to change their behavior, such as imposing corrective taxes and subsidies (i.e. tradable pollution permits). Corrective taxes are taxes that are designedto “internalize the externality” – that is, force private decision-makers to take into account the social costs of any operation. Corrective taxes are different from other taxes because these do not distort incentives, and these taxes work to provide a more efficient market by aligning private and social interests. Another incentive of the market-based policy is the example of a tradable pollution permit. These permits are issued with a face “pollution” value. They establishthe market for permits by providing a fixed amount of permits (inelastic supply curve); in this way, firms with higher abatement costs can buy the permits while firms with lower abatement costs can sell the permits. II. Comparing and Contrasting the PoliciesBoth the command-and-control policy and the market-based policy have similar goals: to reducethe negative externality and create an efficient outcome. However, these two policies have different solutions. In a market-based policy, there is a big tax punishment imposed so owners will drive innovation and create even lower cost solutions. A market-based policy brings with it the role of incentives and the lower cost solutions, more so than a command-and-control policy.III. Private Solutions to ExternalitiesThere are many different types of private solutions and, with these solutions, the government does not always have to step in to internalize externalities. These private solutions include moral codes and social sanctions (the “Golden Rule” or recycling), charities (such as the Sierra Club), and contracst between market participants and the affected bystanders. Additionally, a benefit of private solutions is the Coase theorem. The Coase theorem states that if private parties can bargain without costs over the allocation of resources, they can solve the externalities problem on their own. IV. Why Private Solutions Do Not Always WorkThere are three main reasons why private solutions do not always work: transaction costs, stubbornness, and coordination problems. Transaction costs are the costs incurred in the process of agreeing to and following through on a bargain. There may simply be too many costs to get the parties together and to agree on a solution. Additionally, stubbornness can play a factor: even if a beneficial agreement is possible, each party may hold out for a better deal. Finally, a private solution may not always work due to coordination problems; if there are too many parties or people involved, coordinating can be costly, difficult, or impossible. V. Poverty Poverty is measured by the number of people who fall below a certain level of income, called the poverty line. The poverty line is a number that defines the income needed for a basicstandard of living. An assumption of the poverty line is that the basic standard of living includes a healthy diet. The poverty rate is the percent of the population that is below the poverty
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