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    Chapter 17 - Parkin - PowerPoint

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    Asande
    The document discusses externalities, which are costs or benefits from actions that fall on parties not involved in the action. It explains how external costs can lead to market failures through overproduction, while external benefits can cause underproduction. Specific examples of negative externalities like pollution and positive externalities like education are examined. The chapter covers how property rights, taxation, and regulation can help correct these market inefficiencies. The tragedy of the commons is also introduced as an example of overuse of a common resource due to lack of property rights.

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    Chapter 17 - Parkin - PowerPoint

    Uploaded by

    Asande
    20 views13 pages
    The document discusses externalities, which are costs or benefits from actions that fall on parties not involved in the action. It explains how external costs can lead to market failures through overproduction, while external benefits can cause underproduction. Specific examples of negative externalities like pollution and positive externalities like education are examined. The chapter covers how property rights, taxation, and regulation can help correct these market inefficiencies. The tragedy of the commons is also introduced as an example of overuse of a common resource due to lack of property rights.

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    Chapter 17_Parkin_PowerPoint

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    The document discusses externalities, which are costs or benefits from actions that fall on parties not involved in the action. It explains how external costs can lead to market failures through overproduction, while external benefits can cause underproduction. Specific examples of negative externalities like pollution and positive externalities like education are examined. The chapter covers how property rights, taxation, and regulation can help correct these market inefficiencies. The tragedy of the commons is also introduced as an example of overuse of a common resource due to lack of property rights.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    20 views13 pages

    Chapter 17 - Parkin - PowerPoint

    Uploaded by

    Asande
    The document discusses externalities, which are costs or benefits from actions that fall on parties not involved in the action. It explains how external costs can lead to market failures through overproduction, while external benefits can cause underproduction. Specific examples of negative externalities like pollution and positive externalities like education are examined. The chapter covers how property rights, taxation, and regulation can help correct these market inefficiencies. The tragedy of the commons is also introduced as an example of overuse of a common resource due to lack of property rights.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 13

    Externalities

    Chapter 17

    Economics 3ed: Global and Southern African Perspectives © 2020 1


    Main ideas
    After studying this chapter, you will be able to:

    • Explain how externalities arise


    • Explain why external costs bring market failure and overproduction and how
    property rights and public choices might achieve an efficient outcome
    • Explain the tragedy of the commons and its possible solutions
    • Explain why external benefits bring market failure and underproduction and
    how public choices might achieve and efficient outcome

    Economics 3ed: Global and Southern African Perspectives © 2020 2


    Externalities in Our Lives
    • Externalities are costs or benefits from actions falling on someone who didn’t choose
    the action
    Negative production externalities
    • E.g. Pollution
    Positive production externalities
    • E.g. Beehives next to orchard
    Negative consumption externalities
    • E.g. Smoking
    Positive consumption externalities
    • E.g. Vaccines

    Economics 3ed: Global and Southern African Perspectives © 2020 3


    Negative Externality: Pollution
    Private, external and social cost
    • Marginal private cost (MC): cost of producing additional unit of a good/service that is
    borne by producer
    • Marginal external cost: cost of producing additional unit of a good/service that is
    borne by people other than producer
    • Marginal social cost (MSC): marginal cost incurred by producer and by society.
    o MSC = MC + Marginal external cost

    Valuing an External Cost


    • Economists use market prices to put a rand value on the cost of pollution

    Economics 3ed: Global and Southern African Perspectives © 2020 4


    Negative Externality: Pollution

    Economics 3ed: Global and Southern African Perspectives © 2020 5


    Negative Externality: Pollution
    Options for fixing inefficiencies arising
    from external costs:
    Establish property rights
    • Confronts producers with costs of their
    actions
    • They may respond in two ways:
    o Abatement technology: improved
    technology to reduce pollution
    o Produce less: so as to pollute less
    • Property rights lead to efficient market
    equilibrium
    • Note: Coase Theorem – doesn’t matter
    who owns the property rights

    Economics 3ed: Global and Southern African Perspectives © 2020 6


    Negative Externality: Pollution
    Options for fixing inefficiencies arising
    from external costs:
    Mandate clean technology
    • Regulate what my be dumped/emitted
    – NEMA
    Tax on pollution
    • Pigovian taxes: set T = marginal
    external cost
    Cap-and-trade
    • Cap: pollution quota
    • Leads to trade in pollution permits

    Economics 3ed: Global and Southern African Perspectives © 2020 7


    Negative Externality: The Tragedy of the
    Commons
    Overuse of a common resource, since
    users have no incentive to conserve it and
    use it sustainably
    Unsustainable use of a renewable
    resource
    • Renewable natural resource:
    replenishes itself by birth and growth
    of new members
    o Used sustainably if rate of use ≤
    rate of renewal
    Inefficient use of a common resource
    • Fishers only face private costs

    Economics 3ed: Global and Southern African Perspectives © 2020 8


    Negative Externality: The Tragedy of the
    Commons
    Inefficient use of a common resource
    • Fishers only face private costs
    • Leads to overfishing

    Economics 3ed: Global and Southern African Perspectives © 2020 9


    Negative Externality: The Tragedy of the
    Commons
    Achieving an efficient outcome
    • Must confront users with marginal
    social consequences of their actions

    Property rights
    • Can convert some common resources
    to private ownership

    Production quotas
    • Requires monitoring and enforcement

    Individual transferable quotas (ITQs)


    • Each individual has their own quota,
    which can be traded with other
    producers

    Economics 3ed: Global and Southern African Perspectives © 2020 10


    Positive Externalities: Knowledge
    Private benefits and social benefits
    • Marginal private benefit (MB): benefit received by consuming additional unit of
    good/service

    • Marginal external benefit: benefit received by consuming additional unit of


    good/service, that is received by people other than consumer

    • Marginal social benefit (MSB): marginal benefit enjoyed by consumer and by society.
    o MSB = MB + Marginal external benefit

    Economics 3ed: Global and Southern African Perspectives © 2020 11


    Positive Externalities: Knowledge

    Economics 3ed: Global and Southern African Perspectives © 2020 12


    Positive Externalities: Knowledge
    Government actions in market for
    external benefits

    Public production
    • Production is by public authority
    • Can lead to bureaucratic over-
    spending and under-provision

    Private subsidies
    • Dependent on level of output
    • Same bureaucratic issues as above

    Vouchers
    • Increase willingness to pay, and so
    demand, for item
    • Forces producers to complete and
    increase standards

    Economics 3ed: Global and Southern African Perspectives © 2020 13

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