【正文】 s firms pay to produce ? Since firms are not paying all the costs of production, the ?wedge? between private costs and social costs encourages overproduction 23 Production externalities ? Perfectly petitive market. Supply Curve = marginal cost curve (MC) ? Not all costs of production are borne by the firm, ., pollution ? PMC = private marginal cost, the firm?s costs, therefore, the industry supply ? SMC = social marginal cost ? SMC PMC for all Q 24 Q P Q1 P1 SMC PMC Q2 MC3 25 ? At market price P1, firms are willing to sell Q1 units. However, from a social standpoint, if all costs were paid by the firm, they would only be willing to supply Q2 ? The firm overproduces the good since they do not pay all the costs of production ? At Q1, the firm receives P1 but it costs society MC3 to produce 26 Q P SMC PMC Q2 Q1 P1 P2 SMC1 d b c D c+b= increase in Social benefit c+b+d= increase in Social costs d=deadweight loss 27 ? Market output (P1, Q1) ? At Q1, SMC1 P1 ? Costing society more to produce than is transacted in the market ? Social optimum (P2, Q2) 28 Social Costs of Overproduction ? Notice that as one moves from Q2 to Q1 ? Society is spending an extra d+b+c on additional resources ? Consumers are however enjoying b + c in additional welfare ? The difference is area d, the deadweight loss of overproduction ? If there ever is a ?wedge? between what it costs to produce a good and what people are paying for it, there will be a deadweight loss 29 What about consumption externalities? ? Standard downward sloping demand for a good ? Consumption of the good however has health/financial costs to others (., second hand smoke or drunk driving) ? Private Marginal Benefit Social Marginal Benefit 30 Q P Q1 SMB1 P1 D=PMB SMB 31 ? At Q1, people value the last unit at P1 ? However, not all costs of the good are paid by the consumers ? The SMB is SMB1 which is lower than price ? If people had to pay all the costs of the good (fet how they will do it for now), they would consume a lot less ? Therefore, there is overconsumption of the good 32 Q P S Q2 Q1 SMB2 P1 D=PMB SMB a b b = additional social benefit from excess consum. a+b=additional social costs from excess prod. 33 ? D=S at (P1,Q1) ? At this point ? Costs society and extra a+b to produce ? Society only receives an extra area b in benefits ? Difference (area a) is the deadweight loss of over production ? Again notice the wedge between value of marginal good and the price of the product – The marginal cost of producing the last unit is P1. – The SMB is however only SMB2 34 Internalize the Externality ? Per unit tax on output – Pigouvian taxes ? “Excise tax” ? For every unit sold, charge consumers $t in a tax ? The excise tax will shift down the demand curve by an amount equal to the tax ? Remember, the Y (price) axis is the price transacted between buyers and sellers, does not reflect true cost 35 Q P Q1 D Dt P1 P1 t With tax of t, retail price must fall to P1t in order for demand to stay the same Excise tax of t per unit 36 ? Vertical axis, amount transacted between buyers and sellers ? Without excise tax, at price P1, people willing to consume Q1 ? With a tax of $t/unit, price paid to sellers would have to fall to Pt in order to demand Q1 – Pay P1t to firm – Pay t to government – Pay P1t +t = P1 in total 37 Q P S Q2 Q1 SMB2 P1 D=PMB SMB Dt t 38 Example ? Inverse demand: P=PMB=20 – Q ? Inverse SMB: SMB = 20 – 2Q ? Inverse Supply: P= 2 + Q ? Market oute – Supply = demand – 20 – Q = 2 + Q – Q = 9 – P = 2+Q = 11 39 ? Social optimum – Supply = Social Marginal Benefit – 2 + Q = 20 – 2Q – Q=6 – P = 2+Q = 8 ? What tax should be charged to obtain the social optimum? ? Want output to be Q=6. 40 ? Must choose a tax rate that reduces demand to 6 ? People will demand Q=6 if Pd=14 – PMB = 20 – Q, so when P=14, Q=6 ? Suppliers will supply 6 if Ps=8 ? Pd is inverse demand ? Ps is inverse supply ? With a rax, demand falls to Pdt and we equate Pdt=Ps, so t=PdPs ? Therefore, t=PdPs=148 = 6