【正文】 1 External Costs of Poor Health ECON40565 Fall 2020 2 Introduction ? Much of morbidity and mortality is caused by behavior – 50% of all deaths (tobacco, alcohol, driving, etc) ? Sometimes these behaviors only impact the individual making the decision ? Other times, the behavior can impact others – Financially – Health wise 3 Examples ? Obvious examples – Infectious diseases – Drunk driving – Second hand smoke ? Some not so obvious – Obesity/tobacco use increases costs of health insurance premiums for others – Your immunization reduces the chance that others will be infected 4 This section ? Examine in detail general topic of externalities – Define them – Why they are ?bad? from an economic sense – How can we measure the size of welfare loss ? Show how taxes can be used to limit the social costs of an externality 5 This section ? Extended example: Do smokers and drinkers pay their way? – Alcohol and cigarette consumption generates externalities – They are also taxed at the local, state and federal level – Sum up the external costs of smoking/drinking – Compare to the revenues raised by taxes – Surprising results ? Excellent example of how economists look at problems 6 Before we start ? Basic review of the dead weight loss from externalities ? How taxes can internalize the costs of externalities 7 Demand curve ? Qd = f(P) ? Slopes down due to declining marginal utility ? Height of demand represents the value placed on the last product consumed ? We will always use inverse demand curves – easier to graph ? P = f1(Q) 8 Q P Q1 P1 Qd = f(p) P2 Q1+1 9 Consumer?s Surplus ? Consumers continue to purchase so long as the value of the next unit is greater than price ? But all units priced the same ? Consumer?s value the last unit at P1 ? For all units consumed up to Q1, the value to the consumer exceeded price ? Area A represents consumer?s surplus 10 Q P Q1 P1 A B A = Consumer’s Surplus B = Revenues 11 Example ? Inverse demand curve ? P = 100 – 4Q – When Q=0, P=100 – When P=0, Q=25 ? Suppose P=40, Q=15 ? CS = (1/2)Height*base ? REV=P*Q 12 Q P 100 25 40 15 CS = (1/2)Height*base = (1/2)60(15) = 450 REV = 40*15 = 600 13 Producer?s Surplus ? In petitive market, market supply curve is the horizontal summation of firm?s marginal cost curve ? Height represents the amount firms must receive to sell the last unit ? Since this is the marginal cost curve, it also represents what it costs society to produce the last unit ? Difference between price received and the marginal cost of production is Producer?s Surplus 14 Q P Q1 P1 S Q1+1 P2 Qs=h(p) 15 Q P Q1 P1 S Qs=h(p) c C=producer’s surplus 16 Q P Q1 P1 S D a b CS = a PS = b 17 ? Demand: P=12 – ? Supply: P=2 + ? Graphing – Demand ? Q=0, P=12 ? P=0, q=24 – Supply ? Q=0, P=2 18 Q P S 2 12 24 CS = *B =.5()() = PS = ()()() = 19 Externalities ? Actions of one party make another worse/better off, yet the first party does not bear all the costs/benefits benefits ? The full costs/benefits of an economic transaction are not fully captured in the transacted prices – What person pays in price – What a firm pays in costs 20 Negative Externalities ? Pollution from a production process ? Noise from a nightclub near a residential neighborhood ? The person next to you during an exam has a cold ? Second hand smoke 21 Positive Externalities ? You get a flu shot. This reduces the probability others will get the flu. They benefit, you paid the costs ? Your beautiful garden raises the value of your neighbor?s house ? Lojak: – Transmitted on car that can be used to locate a stolen vehicle – Reduced auto thefts in areas where it was introduced – Only a small fraction had Lojak. As a result, nonLojak users benefited 22 Excess production and negative externalities ? Suppose production of the good generates externalities that are not reflected in costs of inputs (., pollution) ? The true cost of producing the good is above the cost