Microeconomics-Chapter 10

yes

In absence of market failures, , the competitive market outcome is efficient, maximizes total surplus

one type of market failure

The uncompensated impact of one person's actions on the well-being of a bystander

Impact on the bystander is adverse

Impact on the bystander is beneficial

Neglect the external costs or benefits of their actions

So the market outcome is not efficient

Why markets sometimes fail to allocate resources efficiently

How government policies can potentially improve the market's allocation

What kinds of policies are likely to work best

maximizes consumer and producer surplus

the costs directly incurred by sellers.

the value to buyers (the prices they are willing to pay)

private+external cost

value of the negative impact on bystanders

the socially optimal quantity

exceeds social cost.

social cost is greater than its value to society.

Altering incentives so that people take into account the external effects of their actions

market equilibrium=social optimum

The social value of a good includes

Private value - the direct value to buyers

External benefit - the value of the positive impact on bystanders

At any lower Q, the social value of additional units exceeds their cost.

At any higher Q, the cost of the last unit exceeds its social value.

Market quantity larger than socially desirable

Market quantity smaller than socially desirable

Tax goods with negative externalities

Subsidize goods with positive externalities

Regulate behavior directly

-Limits on quantity of pollution emitted

-Requirements that firms adopt a particular technology to reduce emissions

Incentives so that private decision makers will choose to solve the problem on their own

-Corrective taxes and subsidies

-Tradable pollution permits

Corrective taxes (Pigovian taxes)

Induce private decision makers to take account of the social costs that arise from a negative externality

Places a price on the right to pollute

Reduce pollution at a lower cost to society

Raise revenue for the government

Enhance economic efficiency

Have different costs of pollution abatement

Firms with the lowest abatement costs reduce pollution the most

Firms with low abatement costs will reduce pollution to reduce their tax burden.

Firms with high abatement costs have greater willingness to pay tax.

is not efficient

The corrective tax gives firms incentive to continue reducing pollution as long as the cost of doing so is less than the tax

-If a cleaner technology becomes available, the tax gives firms an incentive to adopt it

In contrast, firms have no incentive for further reduction beyond the level specified in a regulation

Congestion-the more you drive the more you contribute to congestion.

Accidents-larger vehicles cause more damage in an accident.

Pollution-burning fossil fuels produces greenhouse gases.

Reduces pollution at lower cost than regulation

-Firms with low cost of reducing pollution do so and sell their unused permits

-Firms with high cost of reducing pollution buy permits

Result: Pollution reduction is concentrated among those firms with lowest costs

Firms pay for their pollution

-Corrective taxes: pay to the government

-Pollution permits: pay to buy permits

Internalize the externality of pollution

"We cannot give anyone the option of polluting for a fee." - by late Senator Edmund Muskie

Eliminating all pollution is impossible

Clean water and clean air - opportunity cost: lower standard of living

Positive income elasticity

-Rich countries can afford a cleaner environment

-More rigorous environmental protection

Clean air and clean water - law of demand

-The lower the price of environmental protection

-The more the public will want it

Moral codes and social sanctions

Charities

Self-interest of the relevant parties
-Integrating different types of businesses

Interested parties can enter into a contract

If private parties can bargain without cost over the allocation of resources

They can solve the problem of externalities on their own

Interested parties can reach a bargain:

Everyone is better off

Outcome is efficient

High transaction costs


Stubbornness

Coordination problems

Costs that parties incur in the process of agreeing to and following through on a bargain

bargaining simply breaks down

Large number of interested parties

Coordinating everyone is costly