Session 8 externalities
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The document discusses externalities and how they can cause market failures. It defines externalities as uncompensated impacts of an economic transaction on a third party. Externalities can be positive, like education spill overs, or negative, like pollution. The socially optimal level of production differs from the market equilibrium when externalities are present. Government policies like Pigouvian taxes or cap-and-trade systems can be used to internalize externalities and restore efficiency. Private solutions sometimes work but transaction costs may prevent cooperation.
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Externalities are unintended side effects of production or consumption that are experienced by third parties. They can lead to market failures if full social costs and benefits are not taken into account. With negative externalities, social costs exceed private costs, resulting in too much of the good being produced from a social perspective. Positive externalities occur when social benefits are greater than private benefits, leading to underproduction of the good from a societal point of view. Diagrams are used to illustrate the concepts of private optimum versus social optimum and the associated welfare losses that can result from externalities.
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1) Externalities occur when the actions of individuals have unintended impacts on third parties. This can result in market failures when private costs/benefits differ from social costs/benefits.
2) For negative externalities like pollution, the private market equilibrium produces too much from a social perspective, since private costs are below social costs. Taxes can internalize these external costs.
3) For positive externalities like education, the private market equilibrium produces too little from a social perspective, since private benefits are below social benefits. Subsidies can internalize these external benefits.
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This document discusses externalities and market failures in microeconomics. It defines externalities as benefits or costs affecting a third party not involved in a transaction. Externalities can be positive or negative. Market failures occur when markets do not allocate resources efficiently due to externalities or other factors. The document provides examples of negative externalities like pollution and positive externalities like education. It explains how government can intervene through subsidies, taxes, and regulations to address market failures from externalities.
Unit 1 Micro: Positive Externalities
There are many occasions when the production and/or consumption of a good or a service creates external benefits which boost social welfare.
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Externalities are costs or benefits that exist outside of the market mechanism and are not reflected in prices. They occur when social costs and benefits differ from private costs and benefits, leading to a misallocation of resources. External costs of production include pollution from cars increasing air pollution. External benefits of consumption can be both private, like enjoying music, and social, like providing entertainment to others. Government intervention may be needed to address positive externalities like research and development or education.
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1. There are three main options for internalizing externalities: setting norms or standards, levying taxes on polluting activities, and enabling market bargaining.
2. Setting norms involves establishing a limit on pollution and penalizing activities that exceed it. Taxes on pollution involve charging polluters per unit of pollution produced. Market bargaining allows polluters and affected parties to negotiate pollution levels directly.
3. An example discusses setting a norm or taxing emissions from a cement factory to reduce air pollution costs to society. Calculations show the effects on production, profits, and social costs with and without regulation.
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Here are the key points that could be made in evaluating the argument for solar subsidies:
- Subsidies distort the free market and may be an inefficient use of taxpayer money if they artificially promote an industry that is not yet competitive. However, supporting emerging technologies like solar can have benefits if it accelerates cost reductions over time.
- While subsidies create jobs in solar installation, they may also negatively impact jobs in other energy sectors. There are opportunity costs to public funds that could be better spent elsewhere.
- Targeting subsidies only to lower-income households could help address the concern that richer households benefit disproportionately. Means-testing subsidies could maximize the social benefits.
- Improving consumer protections against mis-selling and
Externalities, Public Goods, Imperfect Information, and Social Choice
This document discusses several concepts related to market failures including externalities, public goods, imperfect information, and social choice. It provides the following key points:
1. Externalities occur when costs or benefits from an economic activity impact third parties outside the activity. This can lead to an inefficient allocation of resources if not accounted for.
2. Public goods are nonrival and nonexcludable, making them difficult for private markets to provide due to free-rider problems. Government typically provides public goods.
3. Imperfect information in markets can cause problems like adverse selection and moral hazard that prevent efficient exchanges. Both market and government solutions exist.
4. Social choice theory examines how to aggregate
Negative externalities
Negative externalities occur when production or consumption impose costs on third parties not involved in the market transaction. This leads to market failure as prices do not reflect the full social costs. Examples include pollution from factories imposing health costs, and noise pollution from events imposing costs of disruption. Taxes and regulations can help internalize these external costs and improve social welfare, but come with challenges of setting the right level and unintended consequences.
Externalities
An externality is an external effect associated with production and consumption that is not reflected in market prices. Positive externalities provide unintended benefits to third parties, like how smallpox vaccinations eradicated the disease for all. Negative externalities impose unintended costs on third parties, like how secondhand smoke from cigarettes increases health risks for non-smokers.
Carbon Trading and Business Economics
Participation in the EU carbon trading scheme is argued to be an effective policy for reducing carbon emissions from European airlines. The scheme puts a price on carbon and incentivizes airlines to lower emissions and invest in new technologies. However, the low price of carbon permits makes the scheme ineffective. Additionally, the costs imposed on airlines could harm an important industry. Alternative policies like carbon taxation or tougher regulations may be more effective in the long run, especially with a global coordinated approach.
Public finance
This document discusses various topics related to public finance and taxation, including:
- Pure public goods and their key characteristics of non-rivalry and non-excludability. Public universities are given as an example.
- Definitions of budget, surplus budget, balanced budget, and deficit budget. Budgets are periodic estimates of revenue and expenses.
- Planning, programming, and budgeting system (PPBS), which is a formal, cyclic process for policy and strategy decision making involving planning, programming, and budgeting phases. It aims to assess costs and benefits of alternative programs.
- Incidence of taxation, referring to who ultimately bears the burden of a tax. Various factors like elasticity
Business Environment- Features,Meaning,Importance,Objectives & Porter's Model
Competitive Structure Of Industries/Porter's Model, Strategic Groups & Types, Limitations, Critics Of Business Environment.
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This document discusses market failures and reasons for government intervention in markets. It provides examples of two common types of market failures: public goods and external costs. Public goods are nonrival and nonexcludable, so private markets underproduce them. Examples given include national defense and flood control. External costs occur when a third party bears costs from a market activity, such as pollution from factories. This leads markets to overproduce goods with negative externalities. The document argues government can intervene to correct for market failures through policies like taxes, subsidies, and cap-and-trade systems.
Externalities.pdf
This document summarizes a lecture on externalities and government interventions to address market failures. It discusses how externalities arise when one agent's actions impact another outside of market transactions. This can lead to inefficient market outcomes from over- or under-production. The Coase theorem is explained, though implementing Coasian solutions faces challenges with large numbers of agents. Government policies like corrective taxes and quantity regulations can internalize externalities. Regulations require setting the right quantity, while taxes minimize costs if the marginal damage curve is flat. The example of acid rain and the Clean Air Act shows how regulations and emissions trading improved health outcomes.
Is the Competitive Market Efficient.pptx
The document discusses market inefficiency, including sources like price and quantity restrictions, taxes and subsidies, and externalities. These can lead to underproduction or overproduction and deadweight loss. Price ceilings and floors are provided as examples, showing how they reduce total surplus. Market failure can occur when externalities are not considered, there is monopoly power, or information is not shared equally. Externalities, both positive and negative, are discussed in relation to efficiency. Monopolies are also discussed as restricting supply and pushing up prices inefficiently.
Deadweight Loss.pptx
Deadweight loss refers to the decrease in total surplus that results from an inefficient allocation of resources due to market failures like price and quantity restrictions, taxes and subsidies, monopoly power, or externalities. These market inefficiencies can lead to either underproduction or overproduction. Price ceilings and floors can create deadweight loss by causing excess supply or demand when the price is set above or below the market clearing price. Ignoring externalities, like pollution, can also lead to inefficient outcomes if social costs and benefits are not accounted for in supply and demand decisions. Monopolies restrict supply and raise prices above competitive levels, creating another source of deadweight loss.
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To First
Active Learning
What you will learn in this chapter
1
EXTERNALITIES
Externalities (spillovers): the impact on third parties of a transaction between others.
If fracking pollutes drinking water sources, it is an external cost (“negative externality”).
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2
Image credit: Associated Press, MCT via Getty Images
The extra safety your neighbor might have because everyone else in the area has purchased burglar alarms is a(n):
private cost.
external cost.
private benefit.
external benefit.
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Active Learning
LEARN BY DOING: PRACTICE QUESTION
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3
EXTERNALITIES
Examples of external costs:
air and water pollution
texting while driving
chemical runoff that affects fish stocks
Examples of external benefits:
education
beehives next to almond orchards
preserved farmland
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All image credits courtesy of Morgue File and/or FreeImages.com unless otherwise specified
4
FOR INQUIRING MINDS: TEXTING
1 in 4 accidents (250,000 per year) are caused by cell phone use (National Safety Council, 2012)
43 states have banned it… because of the negative (fatal) externalities.
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Image: Steve Debenport/Getty Images
5
IS THE MARKET ALWAYS EFFICIENT?
Market failure: free-market equilibrium not providing the socially optimal amount of a good.
Left to itself, a market economy will typically generate too much pollution because polluters have no incentive to take into account the costs they impose on others.
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All image credits courtesy of Morgue File and/or FreeImages.com unless otherwise specified
6
COSTS AND BENEFITS OF POLLUTION
The marginal social cost of pollution is the additional cost imposed on society as a whole by an additional unit of pollution.
Acid rain, smog, contaminated water, etc.
The marginal social benefit of pollution is the additional gain to society as a whole from an additional unit of pollution.
Goods and services, jobs, etc.
The socially optimal quantity of pollution is the quantity society would choose if all costs and benefits were fully accounted for.
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7
SO HOW DO YOU MEASURE THE MARGINAL SOCIAL COST OF POLLUTION?
It’s the sum of the willingness to pay among all members of society to avoid that unit of pollution.
It may be hard to estimate, so society often underestimates it.
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Macroeconomics is the study of the economy as a whole. Economists use models to examine issues like unemployment, inflation, and growth. Models simplify reality and show relationships between variables. Gross domestic product is a key statistic that measures total expenditure and income in the economy. It has components like consumption, investment, government spending, and net exports. Other important statistics include inflation using the Consumer Price Index and the unemployment rate.
10
Externalities refer to uncompensated impacts of one party's actions on another. Negative externalities occur when costs are imposed on third parties, leading to an equilibrium quantity that is larger than socially optimal. Positive externalities occur when benefits are conferred on third parties, leading to an equilibrium quantity that is smaller than socially optimal. Private solutions sometimes address externalities through bargaining, but transaction costs may impede agreement. When private solutions fail, governments may regulate behavior directly through commands or internalize externalities using Pigovian taxes or tradable pollution permits.
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The document discusses the concepts of equity and efficiency in economics. It defines equity as fairness in how a society's production or income is divided among the population. There are two types of equity: horizontal equity, where those with equal ability to earn should pay equal tax rates, and vertical equity, where those who earn more should pay higher tax rates. The document states that equity and efficiency can be achieved together with government intervention, but there is typically a tradeoff between the two without intervention. Market efficiency is attained when resources are allocated to maximize total surplus, which is the sum of consumer and producer surplus. Sources of market inefficiency include price controls, taxes/subsidies, monopoly power, and externalities.
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Macroeconomics is the study of the economy as a whole. Economists use models to examine issues like unemployment, inflation, and growth. Models simplify reality and show relationships between variables. Gross Domestic Product is a key statistic that measures total expenditure and income in the economy. It has components like consumption, investment, government spending, and net exports. Other important statistics include the Consumer Price Index for inflation and the unemployment rate.
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micro-ch10-presentation-121019103135-phpapp02.pdf
This document discusses externalities, which are uncompensated impacts of one person's actions on another person. It provides examples of negative externalities like pollution and positive externalities like education. It explains that markets fail to allocate resources efficiently when externalities are present. To remedy this, governments can implement corrective taxes on negative externalities and subsidies for positive externalities to align private incentives with social welfare. Alternatively, tradable pollution permits can achieve pollution reduction goals at lower cost than regulations. While private solutions may work in theory, in practice externalities are often best addressed through public policy.
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externalities1 topic for higher level educator
This document discusses externalities and potential solutions. It begins by defining externalities as costs or benefits imposed on third parties not involved in a transaction. Negative production externalities like pollution mean firms do not face all social costs of production, leading to overproduction. The Coase theorem holds that with well-defined property rights and no transaction costs, bargaining can achieve efficiency, but in practice this is difficult for large-scale externalities. Government remedies for externalities include corrective taxes equal to marginal damage or quantity regulations to limit production to efficient levels.
Chapter 3 Micro Foundations of Firm’s Advantage – Dynamic Capabil.docx
Chapter 3: Micro Foundations of Firm’s Advantage – Dynamic Capabilities View
In a previous chapter, we learnt about resource-based view (RBV), knowledge-based view (KBV) and core competence view (CCV) hypotheses. A major limitation of these hypotheses is that they are not designed for the VUCA world – the world that is volatile, uncertain, complex and ambiguous. Therefore, they do not consider the entropy factors – the factors that act as disruptive forces in highly dynamic markets. In this chapter, we will examine three of the most important entry factors:
· mainstreaming of non-consumers, i.e. the rise of new groups of customers served using alternative sets of resources, knowledge and/or core competencies.
· political power play, i.e. the role of non-market – often government-supported - factors in enabling competing firms to develop alternative sets of resources, knowledge and/or core competencies.
· globalization games, i.e. the shifts in the advantages of different national markets, and as a consequence of the firms having investments in those markets.
Micro foundations of firm’s advantage refer to the structures, processes and behaviors that help firms navigate the VUCA world. Development of appropriate structures, processes and behaviors that are in tune with the VUCA world allows firms to be dynamic in their capability. Dynamic capability is the capability for recognizing and responding or adapting to significant market change. Dynamic capability view (DCV) hypothesis of strategic action is intended to help firms stay relevant and is of strategic advantage for larger corporates and their stakeholders.
In this chapter, we will also learn about different types of marketplaces, and how to classify these marketplaces using the niche density (number of firms in a marketplace) and carrying capacity (size of the market) approaches. It is important to recognize the link between the concept of dynamic capability and the type of marketplaces. By operating in different types of marketplaces across different business divisions or regional geographies, the firms may be able to gain experience and develop structures, processes, and behaviors to not only survive but also thrive in a VUCA world.
Exhibit 3.x illustrates the evolution of DCV, based on the refinements of RBV, KBV and CCV. KBV distinguishes capabilities (and knowledge-base of the capabilities) from resources. CCV distinguishes core competencies (creative integration and innovative combination of knowledge) from ordinary capabilities (articulation and replication of knowledge). DCV distinguishes transforming capabilities, from core competencies.
Exhibit 3.x: Refinements in RBV, KBV and CCV Bring DCV in Perspective
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The document discusses different types of market failures including imperfect competition, externalities, absence of property rights, public goods, and imperfect information. It provides examples of each type of market failure and how they can lead to inefficient market outcomes. Specifically, it examines how externalities from production and consumption can create divergence between private and social costs/benefits, resulting in an inefficient allocation of resources where the socially optimal quantity is not produced. This market failure occurs because prices only reflect private costs and benefits, ignoring external effects on third parties.
Dr.Sweety Thomas Market Failure
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Session 8 externalities
- 1. Session 8 Externalities © 2002 by Nelson, a division of Thomson Canada Limited Lectured by Prof. Dr. Ferdinand D. Saragih, MA
- 11. Figure 10-1: The Market for Aluminium Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 10: page 0 Quantity of Aluminium Price of Aluminium Demand (private value) Supply (private costs) Equilibrium Q market
- 15. Figure 10-2: Pollution and the Social Optimum Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 10: page Supply (private costs) 0 Quantity of Aluminium Price of Aluminium Demand (private value) Equilibrium Q market Social costs Q optimum Cost of pollution Optimum
- 17. Figure 10-3: Deadweight Loss of a Negative Production Externality Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 10: page 0 Quantity of Aluminium Price of Aluminium Social costs Demand (private value) H D + A + E D + A + E - H A + B + C + H A + E E - (B + C + H) - (A + B + C) D A + B + C + D P optimum Q optimum P market Q market a b Total surplus Producer surplus Consumer surplus Change At Q Optimum At Q Market D A B C E F G H
- 20. Figure 10-4: Technology Spillovers and the Social Optimum Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 10: page 0 Quantity of Robots Price of Robots Demand (private value) Supply (private costs) Optimum Social costs a b Q optimum P optimum Q market P market Equilibrium Value of technology spillover Deadweight loss
- 25. Figure 10-5: Consumption Externalities Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 10: page (a) Negative Consumption Externalities (b) Positive Consumption Externalities Price of Alcohol Quantity of Alcohol 0 0 Social value Demand (private value) Supply (private cost) Quantity of Education Price of Education Social value Demand (private value) Supply (private cost) Q market Q optimum Q optimum Q market
- 35. Figure 10-6: The Equivalence of Pigovian Taxes and Pollution Permits. Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 10: page (a) Pigovian Tax (b) Pollution Permits Price of Pollution Quantity of Pollution 0 Quantity of Pollution 0 Pigovian Tax P 1. A Pigovian sets the price of pollution… 2. … which together with the demand curve, determines the quantity of pollution… Demand for pollution rights Q Supply of pollution permits 1. … Pollution permits set the quantity of pollution… Q 2. … which together with the demand curve, determines the price of pollution… Demand for pollution rights P
- 38. The End Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 10: page