CHAPTER 18
EXTERNALITIES AND PUBLIC GOODS
TEACHING NOTES
This chapter discuss the remaining types of market failure that were introduced at the end of Chapter 16 and were not covered in Chapter 17. Section 18.1 defines the concept of externalities, both positive and negative. Section 18.2 discuss methods of correcting for the market failure that aris in the prence of externalities. The two ctions give a good lf-contained overview of externalities and possible remedies. If you have limited time, at least try to cover the ctions.
Section 18.3 considers stock externalities where the social cost is due to the accumulated stock of a pollutant. Global warming is an example that will garner student interest. If you want to pursue the global warming example (Example 18.5), you might consider assigning Exerci 8, but do so only if students know how to calculate net prent values. If you do assign Exerci 8, you probably ought to give students the exact net benefit values for all 101 years. The are provided with the answer for that exerci in the following pages. Without the exact values, you will not be able to solve for the requested discount rate.
Section 18.4 deals with property rights and the Coa theorem. Section 18.5 discuss common property resources such as fisheries, and Section 18.6 covers public goods. Section 18.7 offers a brief discussion of determining the optimal level of a public good. Overall the chapter provides a good overview of some very interesting problems. Any instructor who has the time and desire to expand upon the prentation in the chapter can find a wealth of information by consulting an environmental or resource economics textbook. There are an abundance of examples related to pollution and natural resource issues that you could talk about. Check your local newspaper for ideas.
The production and consumption of many goods involve the creation of externalities. Stress the divergence between social and private costs, and the difference between the private (competitive) equilibrium and the socially optimal (efficient) equilibrium. Although private competitive markets produce too much pollution, it is critical to make sure students understand that the optimal amount of pollution is not zero. In fact, it is interesting to ask students to define what zero pollution would mean (it’s not entirely clear) and what life would be like without pollution (no cars, trucks, man-made fertilizer, computers, cell phones, etc., etc.).
葬花吟赏析You can u students’ knowledge of consumer and producer surplus to explore the welfare gain of m
oving from the competitive to the efficient equilibrium. Exerci 9 prents the classic beekeeper/apple-orchard problem, originally popularized in James E. Meade, “External Economies and Diconomies in a Competitive Situation,” Economic Journal, March 1952, 62:245, 54-67. Empirical rearch on this example has shown that beekeepers and orchard owners have solved many of their problems: e Steven N.S. Cheung, “The Fable of the Bees: An Economic Investigation,” Journal of Law and Economics, April 1973, 16:1, 11-33.
One of the main themes of the law and economics literature since 1969 is the application of Coa’s insight on the assignment of property rights. The original article is clear and can be understood by students. Stress the problems pod by transactions costs. For a lively debate, ask students whether non-smokers should be granted the right to smokeless air in public places (e Exerci 5). For an extended discussion of the Coa Theorem at the undergraduate level, e A. Mitchell Polinsky, Chapters 3-6, An Introduction to Law & Economics, Aspen Publishers, 3rd edition, 2003.
The last two ctions of the chapter focus on public goods and private choice. Point out the similarities and differences between public goods and other activities with externalities. Since students confu nonrival and nonexclusive goods, create a table similar to the following and give examples to fill in the cells:
Nonexclusive Exclusive
Rival Most Goods Congested Local Roads
Nonrival Cable TV Programs Public Goods
When determining the amount of a public good the government should provide, some students will not understand why we add individual demand curves vertically rather than horizontally. Stress that by summing horizontally we are finding the total quantity supplied/demanded at any given price. By summing vertically we are finding the total willingness to pay for a given quantity. The coverage of public choice is a limited introduction to the subject, but you can easily expand on this material. A logical extension of this chapter is an introduction to cost-benefit analysis. For applications of this analysis, e Part III, “Empirical Analysis of Policies and Programs,” in Robert H. Haveman and Julius Margolis (eds.), Public Expenditure and Policy Analysis, Houghton Mifflin, 3rd edition, 1983.
QUESTIONS FOR REVIEW
1. Which of the following describes an externality and which does not? Explain the difference.
a. A policy of restricted coffee exports in Brazil caus the U.S. price of coffee to ri –
an increa which in turn also caus the price of tea to ri.
Externalities cau inefficiencies becau the price of the good does not reflect the true
social value of the good. A policy of restricting coffee exports in Brazil caus the U.S.
price of coffee to ri becau supply is reduced. As the price of coffee ris, consumers
switch to tea, thereby increasing the demand for tea, and hence increasing the price of
tea. The are market effects, not externalities.
b.An advertising blimp distracts a motorist who then hits a telephone pole.
The advertising blimp is producing information. However, its method of supplying this
information can be distracting for some consumers, such as tho who happen to be
driving. The blimp is creating a negative externality that influences drivers’ safety.
Since the price the advertising firm charges its client does not incorporate the
externality of distracting drivers, too much of this type of advertising is produced from
the point of view of society as a whole.
2. Compare and contrast the following three mechanisms for treating pollution externalities when the costs and benefits of abatement are uncertain: (a) an emissions fee, (b) an emissions standard, and (c) a system of transferable emissions permits.
The choice between an emissions fee and an emissions standard depends on the
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marginal cost and marginal benefit of reducing pollution. First, suppo small changes
in abatement yield large benefits while adding little to cost. In this ca, if an
emissions fee is t too low becau of uncertainty, the firm will produce far too many
emissions, so a standard is better. However, if small changes in abatement yield little
benefit while adding greatly to cost, the cost of reducing emissions is high. In this ca,
fees should be ud becau tting a standard too high (due to uncertainty) yields little
benefit but increas costs way beyond the efficient level.
A system of transferable emissions permits combines the features of fees and standards
to reduce pollution. Under this system, a standard is t and fees are ud to transfer
permits to firms that value them the most (i.e., firms with high abatement costs).
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However, becau of uncertainty, the total number of permits can be incorrectly chon.
Too few permits will reduce emissions to inefficiently low levels and create excess
demand for the permits, increasing their price and inefficiently diverting resources to
owners of the permits.
Typically, pollution control agencies implement one of the three mechanisms, measure
the results, reasss the success of their choice, then ret new levels of fees or
standards or lect a new policy tool.
3. When do externalities require government intervention? When is such intervention unlikely to be necessary?
Economic efficiency can be achieved without government intervention when the
externality affects a small number of people so that bargaining costs are small. As the
Coa theorem tells us, the resulting outcome will be efficient in this ca regardless of
how property rights are specified. When the conditions are not met, government
intervention is often required.
4. Consider a market in which a firm has monopoly power. Suppo in addition that the firm produces under the prence of either a positive or a negative externality. Does the externality necessarily lead to a greater misallocation of resources?
In the prence of a negative externality, a competitive market produces too much
output compared to the socially optimal amount. But a monopolist restricts output,
so it is possible that the monopolist will produce an output clor to the socially
optimal solution. In the ca of a positive externality, competitive firms produce too
little output. Becau a monopolist produces even less output, the monopolist caus
a greater misallocation of resources.
5. Externalities ari solely becau individuals are unaware of the conquences of their actions. Do you agree or disagree? Explain.
Disagree. It is not that people are unaware but that they have no economic incentive
to consider and account for all of the conquences of their actions. If a firm dumps
阳光的图片waste into a river that affects a swimming area downstream, it is generating a
negative externality for the people downstream. This action maximizes the firm’s
profit if the firm incurs no private costs for dumping and is not forced to consider the
external costs it is imposing on urs of the swimming area. This is true whether the
firm is aware of the social costs or not.
6. To encourage an industry to produce at the socially optimal level, the government should impo a unit tax on output equal to the marginal cost of production. True or fal? Explain.
This statement is fal. While a tax can encourage firms to produce at the socially
optimal level, the tax should be t equal to the marginal external cost and not the
marginal private cost. Competitive firms will maximize profit by producing at the
point where price is equal to marginal cost. When there are external costs involved
数字转换大写the marginal private cost of the firm is too low from society’s point of view, and as a
result too much output is produced. By tting a tax equal to the additional cost not
being realized by the firm (the marginal external cost) the firm will be encouraged to
consider all costs and will reduce output becau the tax will increa its overall
marginal cost.
7. George and Stan live next door to each other. George likes to plant flowers in his garden, but every time he does, Stan’s dog comes over and digs them up. Stan’s dog is causing the damage, so if economic efficiency is to be achieved, it is necessary that Stan pay to put up a fence around his yard to confine the dog. Do you agree or disagree? Explain.
Disagree. Economic efficiency does not require that Stan pay for the fence; it merely
requires that Stan and George resolve the problem so that social welfare (total
benefits less total costs) is maximized, regardless of who pays for it. For example,
George and Stan could split the cost of a fence, George could pay Stan to get rid of his
dog, or Stan could pay George not to plant flowers.
Given typical property rights, it ems likely that George could sue Stan and that a
court would require Stan to pay for a fence or get rid of his dog. And it ems fair
that Stan should have to do this, but it is not required for economic efficiency.
8. An emissions fee is paid to the government, whereas an injurer who is sued and held liable pays damages directly to the party harmed by an externality. What differences in the behavior of victims might you expect to ari under the two arrangements?
When victims can receive the damages directly, they are more likely to file a claim,
initiate a suit, and try to overstate their damages. When victims do not receive the
damages directly, they are less likely to report violations and are less likely to
overstate their damages. In theory, emissions fees paid to the government equal the
damage inflicted on others and hence move firms toward the socially optimal level of
production. But since the fees are paid to the government rather than to the
individuals who were injured, the affected individuals are less likely to file a complaint
than they would if they received compensation for the damages directly.
9. Why does free access to a common property resource generate an inefficient outcome?
Free access to a resource means that the marginal cost to the ur is less than the
marginal social cost, becau each ur has no incentive to consider how his u of the
resource will affect the u of the resource by others. The u of a common property
resource by a person or firm reduces others’ u of it. For example, the u of water by
one consumer restricts its u by another. Since private marginal cost is below social
marginal cost, too much of the resource is consumed by the individual ur, creating an
inefficient outcome. Each individual using the common property resource considers
only his own actions and does not consider how all of the urs collectively are affecting
the resource.
10. Public goods are both nonrival and nonexclusive. Explain each of the terms and show clearly how they differ from each other.
A good is nonrival if, for any level of production, the marginal cost of providing the good
to an additional individual is zero (although the cost to produce an additional unit
could be greater than zero). A good is nonexclusive if it is impossible or very expensive
to exclude individuals from consuming it once it is available to one individual. Public
goods are nonrival and nonexclusive. Good examples are national defen, a lighthou
and public television. Some goods are nonrival but exclusive such as a bridge during
low traffic periods. One more person can u the bridge without any additional cost to
the bridge authority and without imposing costs on other drivers in the form of
congestion, but the bridge authority can exclude urs by tting up tollbooths. Some
goods are nonexclusive but rival. For example, a large lake can be nonexclusive becau
anyone can u it, but the more people there are fishing, the fewer fish are available to
others, so it is rival.
11. A village is located next to 1000 acres of prime grazing land. The village prently owns the land and allows all residents to graze cows freely. Some members of the village council have suggested that the land is being overgrazed. Is this likely to be true? The same members have also suggested that the village should either require grazers to purcha an annual permit or ll off the land to the grazers. Would either of the be a good idea?
It is true that the common land is likely to be overgrazed since each individual will
consider only their own private cost and not the total social cost of grazing. The
social cost of grazing is likely to be higher than any one individual’s private cost
becau no one individual has an incentive to take into account how his grazing
affects the opportunities of others. As a result, conrvation efforts by individuals
are pointless.
For example, one individual could decide to graze only in certain areas during certain
times of the year, while prerving other areas for other times of the year. However,
the individual will not do this if the resource is common property as any other grazer
故事的英语can come along and freely disrupt the prervation system that the individual has
t up.
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Selling annual permits may help, but an annual permit will exclude only tho
grazers who total benefits are less than the price of the permit. Anyone who buys
the permit will still have the same incentive to overgraze the commons. Selling the
land outright is a better solution to the overgrazing problem. If an individual
purchas the land she will then have an incentive to consider all of the costs
associated with using the land, and as a result will u it in such a way that the
resource is prerved, since she alone captures all of the benefits of prerving the
resource. Another possibility would be to charge urs bad on the amount of
grazing their cows do. If the grazing fee were t correctly, the efficient amount of
grazing could be induced. However, it might be difficult to determine the correct fee,
and the village would have to keep track of each resident’s grazing and bill him or
her accordingly.
12. Public television is funded in part by private donations, even though anyone with a television t can watch for free. Can you explain this phenomenon in light of the free rider problem?
The free rider problem refers to the difficulty of excluding people from consuming a
nonexclusive commodity. Non-paying consumers can “free-ride” on commodities
provided by paying customers. Public television is funded in part by contributions.
Some viewers contribute, but most watch without paying, hoping that someone el
will pay so they will not have to. To combat this problem the stations ask consumers
to asss their true willingness to pay and ask them to contribute up to this amount.
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They then attempt to make tho people feel good about their actions and make
everyone el feel guilty for free riding.
13. Explain why the median voter outcome need not be efficient when majority-rule voting determines the level of public spending.
The median voter is the citizen with the middle preference: half the voting population
is more strongly in favor of the issue and half is more strongly oppod. Under
majority-rule voting, where each citizen’s vote is weighted equally, the preferred
spending level on public-goods provision of the median voter will win an election
against any other alternative. However, majority rule is not necessarily efficient,
becau it gives each citizen’s preferences equal weight. For an efficient outcome, we
would need a system that measures and aggregates the willingness to pay of tho
citizens consuming the public good. Majority rule is not this system. However, as we
have en in previous chapters, majority rule is equitable in the n that all citizens
are treated equally. Thus, we again find a trade-off between equity and efficiency.
