【正文】 e of Abatement 12 Fee MSC MCA E* 169。2020 Pearson Education, Inc. Chapter 18 19 Ways of Correcting Market Failure ? Options for Reducing Emissions to E* 1. Emissions Standard ? Set a legal limit on emissions at E* (12) ? Enforced by moary and criminal penalties ? Increases the cost of production and the threshold price to enter the industry 2. Emissions Fee ? Charge levied on each unit of emission 169。2020 Pearson Education, Inc. Chapter 18 17 The Efficient Level of Emissions 2 4 6 Dollars/ Unit of Emissions Level 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 where MCA = MSC. 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 169。2020 Pearson Education, Inc. Chapter 18 15 Ways of Correcting Market Failure ?MCA is marginal cost of abating emissions ?Additional cost to firm of controlling pollution ?Downward sloping because when emissions are high, there is little cost to controlling them ? Large reductions require costly changes in production process 169。2020 Pearson Education, Inc. Chapter 18 13 MC P1 External Benefits Repair Level Value D 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. 169。2020 Pearson Education, Inc. Chapter 18 11 External Cost ?Negative externalities encourage inefficient firms to remain in the industry and create excessive production in the long run 169。2020 Pearson Education, Inc. Chapter 18 9 External Costs MC S = MCI P1 q1 P1 Q1 MSC MSCI Firm output Price Industry output Price MEC MECI q* P* Q* D Firm will produce q1 at P1. There is MEC of produc ion from the waste released. The MSC is true cost of production. The profit maximizing firm produces t q1 whil the efficient output level s q*. 169。2020 Pearson Education, Inc. Chapter 18 7 Negative Externalities and Inefficiency ?Assume the firm has a fixed proportions production function and cannot alter its input binations ?The only way to reduce waste is to reduce output ?Price of steel and quantity of steel initially produced given by the intersection of supply and demand 169。2020 Pearson Education, Inc. Chapter 18 5 Externalities ?Positive ?Action by one party benefits another party ? Homeowner plants a beautiful garden where all the neighbors benefit from it ? Homeowner did not take their benefits into account when deciding to plant 169。2020 Pearson Education, Inc. Chapter 18 3 Externalities ?Externalities arise between producers, between consumers, or between producers and consumers ?Externalities are the effects of production and consumption activities not directly reflected in the market ?They can be negative or positive 169。Chapter 18 Externalities and Public Goods 169。2020 Pearson Education, Inc. Chapter 18 2 Topics to be Discussed ?Externalities ?Ways of Correcting Market Failure ?Externalities and Property Rights ?Common Property Resources ?Public Goods ?Private Preferences for Public Goods 169。2020 Pearson Education, Inc. Chapter 18 4 Externalities ?Negative ?Action by one party imposes a cost on another party ? Plant dumps waste in a river, affecting those downstream ? The firm has no incentive to account for the external costs that it imposes on those downstream 169。2020 Pearson Education, Inc. Chapter 18 6 Negative Externalities and Inefficiency ?Scenario – plant dumping waste ?Marginal External Cost (MEC) is the increase in cost imposed on fishermen downstream for each level of production ?Marginal Social Cost (MSC) is MC plus MEC ?We can show the petitive market firm decision and the market demand and supply curves 169。2020 Pearson Education, Inc. Chapter 18 8 Negative Externalities and Inefficiency ? The MC curve for the firm is the marginal cost of production ? Firm maximizes profit by producing where MC equals price in a petitive firm ? As firm output increases, external costs on fishermen also increase, measured by the marginal external cost curve ? From a social point of view, the firm produces too much output 169。2020 Pearson Education, Inc. Chapter 18 10 External Costs Aggregate social cost of negative externality By not producing at the efficient level, there is a social cost on society. MC S = MCI D P1 P1 q1 Q1 MSC MSCI Firm output Price Industry output Price MEC MECI q* P* Q* 169。2020 Pearson Education, Inc. Chapter 18 12 Positive Externalities and Inefficiency ?Externalities can also result in too little production, as can be shown in an example of home repair and landscaping ?Repairs generate external benefits to the neighbors ?Shown by the Marginal External Benefit curve (MEB) ?Marginal Social Benefit (MSB) curve adds MEB +D 169。2020 Pearson Education, Inc. Chapter 18 14 Ways of Correcting Market Failure ?Assumption: The market failure is pollution ?Output decision and emissions decision are independent ?Firm has chosen its profitmaximizing output level ?MSC is marginal social cost of emissions ? Equivalent to MEC from before ? Upward sloping because of substantially increasing harm as pollution increases 169。2020 Pearson Education, Inc. Chapter 18 16 Ways of Correcting Market Failure ?If the firm does not consider abatement, their profit maximizing level is 26 units of emissions ?Level where MCA is zero ?The socially efficient level of emissions is 12 wher