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Public Goods
16
Chapter Outline
16.1
Externalities
16.2
Fixing Externalities
16.3
Further Topics in
Externalities and Their Remedies
16.4
Public Goods
16.5 Conclusion
16-1
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Introduction
16
16-2
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Introduction
16
Externalities
Public goods
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16-3
16.1Externalities
16
16-4
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16.1Externalities
16
16.1Externalities
16
16-6
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16.1Externalities
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16.1Externalities
16
The costs of operating the plant are borne by the plant, but the
health effects are external costs, borne by society
Consider a competitive market for electricity
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16.1Externalities
16
P*
PMKT
A perfectly competitive
Social marginal cost,Because
themarket
marketproduces
does not
electricity
SMC = MCI + EMC take
marginal
cost
QMKTexternal
at market
price PMKT
,
Deadweight loss
into account
where Swhen
= MCIsetting
= D. its
from externality
At
this
quantity,
the
of output, itindustry
ends up
Supply, S = MCI quantity
imposes
external
marginal
producing more electricity
cost
EMC.
A
QMKTequals
than
is
the
socially
SMC
the
sum
of MCI
optimal
quantity
B
and
EMC. Q*,
Total
surplus
is
maximized at
resulting in a deadweight
Q*< from
QMKT ,overproduction
where price P*
loss
EMC
SMC.triangle.
equal to equals
the shaded
External marginal
cost, EMC
Demand, D
Q*
QMKT
Quantity of
electricity (MWh)
16-9
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16.1Externalities
16
16-10
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Leather Tanning
figure it out
2.
Suppose that leather tanning is a polluting activity that releases chromium and other pollutants into local waterways. The external marginal cost is estimated to be $4 for each hide produced. Calculate the socially optimal level of output and price for the leather tanning industry.
16-11
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figure it out
Leather Tanning
1.
3Q 60 7Q
10Q 60
Q 6 million hides
Using the supply curve to solve for the equilibrium price yields
2.
The social marginal cost is equal to the industry marginal cost plus
P 3Q $18
To find the social optimum, equate SMC with the inverse demand
SMC MC EMC 3Q 4
3Q 4 60 7Q
10Q 56
Q 5.6
P 3Q 4.00 16.8 4 $20.8
16-12
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16.1Externalities
16
16.1Externalities
16
External marginal
benefit, EMB
Quantity of
college degrees
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Fixing
16.2Externalities
16
16-15
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Fixing
16.2Externalities
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16-16
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Fixing
16.2Externalities
16
*
PPOLL
Quantity of
pollution
16-17
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Fixing
16.2Externalities
16
Fixing
16.2Externalities
16
Fixing
16.2Externalities
16
16-20
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Fixing
16.2Externalities
16
P*
PMKT
SMC = MCI + T
S = MCI
A
B
EMC = T
Q* QMKT
In an unregulated market, a
power company
Now, the power
company
overproduces
quantity
QMKT
produces
at
point
A,
where
at price PMKT (point B).
SMC intersects demand D,
A Pigouvian tax T equal to
and supplies the socially
the external marginal cost
efficient quantity Q* MWh at
EMC shifts up the supply
price P*.
curve S from marginal cost
= MCI to the social marginal
EMC = Tax,
T curve SMC.
cost
D
Quantity of
electricity (MWh)
16-21
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Fixing
16.2Externalities
16
16-22
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Fixing
16.2Externalities
16
P*
PMKT
S = MCI
In an unregulated market,
colleges
Now,
the under
collegeproduce
market
quantity
Q
,
college
MKT
produces where
supply S
degrees,
atSD,
price
PMKT
(point
intersects
and
supplies
A Pigouvian subsidy Sub
B).
the socially efficient
quantity
equal to external marginal
Q*, college degrees, at price
benefit EMB shifts demand D
P* (point A).
out to social demand SD.
SD = D + EMB = D + Sub
EMB = Subsidy, Sub
D
QMKT Q*
Quantity of
college degrees
16-23
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Leather Tanning
figure it out
How many leather hides would be sold, what price would buyers pay, and what price would sellers receive (net of the tax)?
16-24
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figure it out
Leather Tanning
P B 60 7Q
To equate the two inverse demand curves, however, requires us to rewrite the supply curve in terms of PB
P B P S 4 3Q 4
And the prices paid by buyers and sellers are:
3Q 4 60 7Q
10Q 56
Q 5 .6
P B 3Q 4 $20.8
P S 3Q $16.8
16-25
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Fixing
16.2Externalities
16
16-26
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Fixing
16.2Externalities
16
SMC
S = MCI
A
P*
PMKT
Quota = Q*QMKT
In an unregulated market, a
power company overproduces
quantity QMKT at price PMKT
(point B).
When the government enacts a
quota limiting production to
Q*, the private marginal cost
curve MCI becomes vertical at
Q*, intersecting the social
marginal cost SMC at the
socially optimal quantity Q*
EMC
and price P* (point A).
D
Quantity of
electricity (MWh)
16-27
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Application
16
Rationalization in Fisheries
Historically, fishing effort was managed using tools such as
total allowable catch (TAC) limits and limited entry (LE)
In the British Columbia, Canada, (B.C.) halibut fishery,
these two regulations effectively limited catch but had
other consequences
In response to the LE (limited to 435 vessels), in the
1980s vessel owners invested in alternative forms of
capital (e.g., better electronics, larger crews)
In response to the TAC, fishermen fished as fast as they
could, as soon as the season opened (in 1982, 60-day
season; in 1990, a 6-day season)
This derby fishing was very dangerous. Fishermen
would go out in horrible weather, and sinkings and
deaths increased
Further, the short seasons made it difficult to enforce
Citation: Casey, K, C. Dewees, J. Wilen, and B. Turris, 1995. The Effects of Individual Transferable Harvest Quotas
the
TAC; TAC was exceeded by 10% in 1990
in the British Columbia Halibut Fishery, Marine Resource Economics 10(5).
16-28
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Application
16
Rationalization in Fisheries
In response, the B.C. government decided to implement an
individual vessel quota system (IVQ)
Vessels given a yearly share of the TAC and the right to
fish at any point in an 8-month season (until the TAC is
reached)
At first, IVQs were not tradable, but they were leasable;
trading was allowed after two-year trial period
Enforcement self-funded (tax of C$0.09/pound)
Many benefits:
Firms focus on lowering costs rather than racing to fish
Longer season made fishing safer, reduced idle capital
Longer season also increased fish prices, as more fish
were able to be sold to fresh markets, rather than
frozen
Citation: Casey, K., C. Dewees, J. Wilen, and B.Turris, 1995. The Effects of Individual Transferable Harvest Quotas
Fishermen
felt more secure in their investments; profits
in the British Columbia Halibut Fishery, Marine Resource Economics 10(5).
grew
16-29
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Application
16
Rationalization in Fisheries
Also some problems
Vessel owners were primary beneficiaries. Reported
crew shares declined (crew are often paid a percentage
of revenue; now, quota was viewed as a valuable asset
and worthy of its own share)
Focus on cost savings reduced fishing employment in
communities with few outside options
Is it fair to permanently bequest access rights to a
public asset to private citizens?
Photos courtesy of NOAA Fisheries
Citation: Casey, K., C. Dewees, J. Wilen, and B. Turris, 1995. The Effects of Individual Transferable Harvest Quotas
in the British Columbia Halibut Fishery, Marine Resource Economics 10(5).
16-30
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Fixing
16.2Externalities
16
Fixing
16.2Externalities
16
Fixing
16.2Externalities
16
Fixing
16.2Externalities
16
16-34
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Fixing
16.2Externalities
16
T*
T
A
X
B
If government regulators
Because MAC is flat relative to
incorrectly estimate farmers
MCP, the quantity-based
marginal abatement costs (MACe
intervention is preferable to the
Y
< MAC),
the quantity-based
price
mechanism,
as seen by
intervention
would
reduce
comparing the resulting
C
pollution
to POLL
POLL*,
B <from
deadweight
losses
thewhile
two
Pigouvian
tax would
increase
MBP =the
MAC
interventions
(X < Y).
pollution to POLLC > POLL*.
MBPe = MACe
Fixing
16.2Externalities
16
T*
T
X
B
Y
C
Deadweight loss
from Pigouvian tax
If government
regulators
Because
MAC is steep
relative to
incorrectly
estimate
farmers
the marginal cost of pollution
marginal
abatement
costs (MAC
MCP, the
price mechanism
is e
<preferable
MAC), theto
quantity-based
the quantity
MBP = MAC
intervention
reduce
mechanism,would
as seen
by
pollution
to POLL
while
comparing
the
B <POLL*,
resulting
MBPe = MACe
the
Pigouvianlosses
tax would
deadweight
from increase
the two
Quantity
of
fertilizer
pollution
to POLL(X
POLLB POLL* POLLC
interventions
Y).
C ><POLL*.
runoff (ppm)
16-36
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Fixing
16.2Externalities
16
Fixing
16.2Externalities
16
16-38
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Fixing
16.2Externalities
16
MACA 2eA
MACB eB
Notice that each firms MAC increases as they cut more; each
additional unit of pollution reduction costs more than the last
Fixing
16.2Externalities
16
If, at any allocation of pollution cuts, Best has a lower MAC than
Acme, the standard could be met at a lower cost by shifting cuts to
Best from Acme
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Fixing
16.2Externalities
16
eA eB 30
Using this equation and the one above, solve the first for eB, and then
substitute into the second
eB 2eA eA 2eA 30 eA 10
Fixing
16.2Externalities
16
High-cost firms purchase permits from low-cost firms until there are
no mutually beneficial trades remaining
The market
price
permits
will
be equal to
MAC
for
16-42
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Microeconomics
Goolsbee/Levitt/Syverson
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Noise Pollution
figure it out
Global Package Service (GPS) and Mail & Parcel Service (MAPS)
are cargo airlines using a small regional airport. Their jets inflict
noise pollution on a nearby town. At current production levels,
GPS creates 600 decibel-hours (dbh) of noise each day, while
MAPS creates 750 dbh. Government regulators would like to lower
the total noise pollution to 1,000 dbh. GPS faces a total
abatement cost of TACG = 20dG + 2dG2 and a marginal abatement
cost of MACG = 20 + 4dG, where dG is the number of dbh abated
by GPS. MAPS planes are older, so its TAC and MAC are greater:
TACM = 40dM + 3dM2 and MACM = 40 + 6dM.
Answer the following questions:
Noise Pollution
figure it out
The cost of this plan is equal to the sum of each firms total abatement cost
16-44
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figure it out
Noise Pollution
Remembering that
20 4 350 dM 40 6dM
10dM 1, 380 dM 138dbh
dG 350 dM 350 138 212dbh
Noise Pollution
figure it out
16-46
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Further Topics in
Externalities and Their
Remedies
16.3
16
16-47
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Further Topics in
Externalities and Their
Remedies
16.3
16
Further Topics in
Externalities and Their
Remedies
16.3
16
Further Topics in
Externalities and Their
Remedies
16.3
16
figure it out
1.
If Green Acres has the right to emit the odors, what will the socially optimal outcome be? How will it be reached? Will any money change hands?
2.
If Barney has the right to odor-free air, what will the socially optimal outcome be? How will it be reached? Will any money change hands?
16-51
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Figure it out
16-52
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Further Topics in
Externalities and Their
Remedies
16.3
16
Application
16
Application
16
16.4Public Goods
16
Using theCopyright
definitions
of excludability and rivalry, we
can
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16.4Public Goods
16
16-57
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16.4Public Goods
16
MBT MBi
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16.4Public Goods
16
Marginal benefit,
marginal cost
Total marginal benefit,
MBT = MB1 + MB2
MB2
MB1
Q1
*
Q2 QPub
MC
16-59
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16.4Public Goods
16
Public Goods
figure it out
1.
2.
3.
Would you expect Dale and Casey to build the optimally sized fountain? Explain.
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figure it out
Public Goods
MBT MC 110 3Q 80
30 3Q Q 10
The socially optimal diameter for the fountain is 10 feet.
3. Dale will not be willing to build a fountain that is 10 feet in diameter
because his private marginal benefit is less than the marginal cost
MBD 70 Q 70 10 60 MC (80)
Casey also will be unwilling to build a 10-foot fountain because his private
marginal benefit from a 10-foot fountain is lower than the marginal cost:
MBC 40 2Q 40 20 20 MC (80)
16.4Public Goods
16
Governments have the ability to tax citizens, and those powers are
often used to provide public goods such as national defense, air
traffic control, weather forecasting services, etc.
16-63
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Application
16
Citation: Jacobsen, G.D. 2011. The Al Gore Effect: An Inconvenient Truth and Voluntary Carbon Offsets. Journal of Environmental Economics and
Management 61(1):
6778.
16-64
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Application
16
6778.
16-65
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16.5Conclusion
16
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