Slide 1Correcting market failuresSlide 3Important casesSlide 5Slide 6Slide 7Possible interventionsSlide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18AGEC/FNR 406 LECTURE 14Pesticide Runoff Potential from Field CropsCorrecting market failuresStatic efficiency is obtained when net benefits for a single period’s are maximized.If private efficiency does not equal social efficiency, then we have market failure. Intervention may be justified, and many approaches are available. What is the “best” way to correct the market failure?Marginal damage functionDollar measure of incremental damage from pollutionQ of EmissionEDamagesMDTotal DamageDImportant cases1. private benefits = social benefits private costs = social costs (no market failure)2. private benefits = social benefits private costs NE social costs (positive or negative externality)3. private benefits NE social benefits private costs = social costs (positive or negative externality)Case 1private benefits = social benefitsprivate costs = social costsQQ*P*PMC=SMCPMB=SMBCase 2private benefits = social benefits private costs NE social costsSMC = PMC + MDQ QPPMCPMB=SMBQ*P*MDCase 3private benefits NE social benefits private costs = social costs Loss inBenefitQ Q*P*PMC=SMCSMBQPPMBPossible interventions1. Moral suasion2. Government provision of goods3. Damage prevention4. Command and control5. Economic IncentivesDeriving values for non-market goodsTwo conceptual approaches to valuation 1. Revealed preference2. Stated preferenceRevealed preference approachesHedonic pricingprice attributed to characteristics of a good Hedonic wagesaccepted wages reflect tradeoffs such as risk and living conditionsTravel costthe value of a recreation site reflects the costpeople willingly pay to get to itStated preference approachContingent valuationuse a survey to measure willingness to payregarding actual or hypothetical changes in the environmentExample 1: Hedonic wageConstruction work is risky, and the riskiest jobs have wage premia. What if workers are willing to accept a 1/1000 annual risk of death to take a job that pays $1200 more per year?What is the value of one “statistical life”?Calculating the hedonic wage Workers are willing to accept a 1/1000 annual risk of death to take a job that pays $1200 more per year.$1,200 * 1000 = $1,200,0001000 people have a collective willingness to accept $1.2 million to be exposed to the death of one individual.Example 2: Travel cost model5 people 1 recreation site{A,B,C,D,E}ABCDEVisitation data Individual Cost # visitsA 0 50B 25 45C 50 40D 125 25E 250 0Construct a demand curve 50TravelCostP = 250 -5Q 0Number of visits 0D 250•••••CBAE Individual Cost # visitsE 250 0D 125 25C 50 40 B 25 45A 0 501. consumer surplus (TB) 50TravelCostP = 250 -5Q 0Number of visits25 0D 250•••••CBAEDemand curve can be used to find: 2. impact of increased