【正文】 Lecture 16 Externalities and Public Goods 1 Chapter 1 Topics to be Discussed ? Externalities ? Ways of Correcting Market Failure ? Externalities and Property Rights ? Common Property Resources 2 Chapter 1 Topics to be Discussed ? Public Goods ? Private Preferences for Public Goods 3 Chapter 1 Externalities ? Negative ? Action by one party imposes a cost on another party ? Positive ? Action by one party benefits another party 4 Chapter 1 External Cost ? Scenario ? Steel plant dumping waste in a river ? The entire steel market effluent can be reduced by lowering output (fixed proportions production function) 5 Chapter 1 External Cost ? Scenario ? Marginal External Cost (MEC) is the cost imposed on fishermen downstream for each level of production. ? Marginal Social Cost (MSC) is MC plus MEC. 6 Chapter 1 MC S = MCI D P1 Aggregate social cost of negative externality P1 q1 Q1 MSC MSCI When there are negative externalities, the marginal social cost MSC is higher than the marginal cost. External Costs Firm output Price Industry output Price MEC MECI The differences is the marginal external cost MEC. q* P* Q* The industry petitive output is Q1 while the efficient level is Q*. The profit maximizing firm produces at q1 while the efficient output level is q*. 7 Chapter 1 External Cost ? Negative Externalities encourage inefficient firms to remain in the industry and create excessive production in the long run. 8 Chapter 1 Externalities ? Positive Externalities and Inefficiency ? Externalities can also result in too little production, as can be shown in an example of home repair and landscaping. 9 Chapter 1 MC P1 External Benefits Repair Level Value D Is research and development discouraged by positive externalities? q1 MSB MEB When there are positive externalities (the benefits of repairs to neighbors), marginal social benefits MSB are higher than marginal benefits D. q* P* A selfinterested home owner invests q1 in repairs. The efficient level of repairs q* is higher. The higher price P1 discourages repair. 10 Chapter 1 Ways of Correcting Market Failure ? Assumption: The market failure is pollution ? Fixedproportion production technology ?Must reduce output to reduce emissions ?Use an output tax to reduce output ? Input substitution possible by altering technology 11 Chapter 1 The Efficient Level of Emissions Level of Emissions 2 4 6 Dollars per unit of Emissions 0 2 4 6 8 10 12 14 16 18 20 22 24 26 MSC MCA E* The efficient level of emissions is 12 (E*) where MCA = MSC. Assume: 1) Competitive market 2) Output and emissions decisions are independent 3) Profit maximizing output chosen At Eo the marginal cost of abating emissions is greater than the marginal social cost. E0 At E1 the marginal social cost is greater than the marginal benefit. E1 Why is this more efficient than zero emissions? 12 Chapter 1 Example ? Assume that scientific studies provide you with the following information concerning the benefits and costs of sulfur dioxide emissions: ? Benefits of abating(reducing) emissions: ? MB=40010A ? Costs of abating emissions: MC=100+20A ? Where A is the quantity abated in millions of tons and the benefits and costs are given in dollars per ton. ? A. What is the socially efficient level of emissions abatement? ? B. What are the marginal benefit and marginal cost of abatement at the socially efficient level of abatement? ? C. What happens to social benefits( benefits minus costs) if you abate one million more tons than the efficient level? One million fewer? ? D. Why is it socially efficient to set marginal benefits equal to marginal costs rather than abating until total benefits equal total costs