2. 1.) Externality Types
2.) The Graphs
3.) Solutions
Market Failure - Externalities
“Internalize the externality” 内部化的外部性
3. Property Rights
Important Vocabulary…
- Legally established titles to the
ownership, use and disposal of
factors of production and goods and
services that are enforceable in the
court of law.
People take care of things
they own more then other
people’s things that they are
not responsible for.
13. The water belongs
to me!
I don’t want to
pollute my own
water! But I don’t
care about others
because it only
cost me money!
If the factory
owned the river…
14. The water
belongs to us!
We don’t
want any
pollution!
If the people
owned the river…
If I can’t pollute, I
can’t produce. I
produce iphones
that everyone
wants.
No pollution
means no iphones!
15. It matters who owns
the river…
As long as someone
owns it.
16. Means an additional one, the
measurement from one unit to the next.
最后的东西之一
Marginal Benefits VS. Marginal Costs
边际效益 针对 边际成本
(MB) (MC)
If MB > MC = It is worth doing 这是值得的
If MB = MC = It may be worth doing “a wash” 收支平衡
If MB < MC = Not worth doing 这是不值得的
Also called Cost/Benefit analysis
Marginal Thinking
Using this concept again to determine to right
amounts of doing things…
17. Means an additional one, the
measurement from one unit to the next.
最后的东西之一
Marginal Social Benefits VS. Marginal Social Costs
边际效益 针对 边际成本
(MB) (MC)
If MSB > MSC = It is worth doing 这是值得的
If MSB = MSC = It may be worth doing “a wash” 收支平衡
If MSB < MSC = Not worth doing 这是不值得的
Also called Cost/Benefit analysis
Marginal Thinking
But adding in all of society.
18. - Regulate behavior directly.
Examples:
- limits on quantity of pollution emitted
- requirements that firms adopt a particular
technology to reduce emissions
- Laws
4.) Government Solutions
“Internalize the externality” 内部化的外部性
Two general approaches to the strategies:
Command-and-control policies
- Provide incentives so that private decision-makers
will choose to solve the problem on their own.
Examples:
- corrective taxes and subsidies
- tradable pollution permits
Market-based policies
19. If Externality is Positive:
1.)Patent and copyrights - monopoly power
2.)Vouchers - money to consumers
3.)Subsidies - money to producers
4.)Public Provision - government builds it
consumers pays some
Government pays
the difference
to increase
production
Make offenders pay the
government or each
other to decrease
production
If Externality is Negative:
1.)Regulations - laws (property rights)
2.)Taxes - force them to pay
3.)Marketable Permits - trading rights
4.) Government Solutions
“Internalize the externality” 内部化的外部性
21. If Externality is Negative:
1.)Regulations - laws (don’t work)
4.) Government Solutions
- Regulation agencies determine
what any external cost is simply
create laws to get the desired
effect.
“Internalize the externality” 内部化的外部性
22. Ways to interpret Economic theory
Positive economics
is the study of what is
结果是基于数据
Normative economics
is the study of what should be
是基于你的愿望是什么结果
- laws (don’t really always work)
Economists mostly think laws
alone don’t work very well alone.
24. Regulation that works:
Property Rights
4.) Government Solutions
- Legally established titles to the
ownership, use and disposal of
factors of production and goods and
services that are enforceable in the
court of law.
However these work
great!
25. Ownership of this land can
stop it from being ruined,
because someone will take
care of it.
26. Ownership of this river
is important to solve this
problem.
However…
It matter who owns it,
the outcome will
depend on it, as long as
someone owns it!
27. If Externality is Negative:
1.)Regulations - laws (don’t work)
2.)Taxes - force them to pay
4.) Government Solutions
“Internalize the externality” 内部化的外部性
- a tax designed to induce private
decision-makers to take account
of the social costs.
28. 1.) Some Tax Basics
What a Tax does in the Market:
- raises the price buyers pay
- lowers the price sellers receive.
- reduces the quantity bought sold.
Purposes of Taxes:
-Raise money to purchase the things
that markets usually don’t make.
-(public goods)
-Restrict certain behaviors.
-(market failure)
-Reallocate 重新分配 wealth.
(subsidies)
29. 4.) Government Solutions
Also can be called:
- Corrective Tax
- Pigouvian Taxes
Named after Arthur Pigou (1877-1959).
and can also apply to positive
externalities in the form of subsidies.
2.)Taxes - a tax designed to induce private decision-makers to take
account of the social costs.
30. P
Q
MB
P
EQ
External
cost
MSC
S = MC + Tax = MSC
EQ is at MSC = MB
The ideal tax is =
to external costs
( MEC )
Tax amount
4.) Government Solutions
Also can be called:
- Corrective Tax
- Pigouvian Taxes
2.)Taxes
31. 2.)Taxes
4.) Government Solutions
How to figure out the size
of the Corrective Tax?
2 basic ways:
- Compare to what it
used to be.
- Compare to something
else similar.
40. 4.) Government Solutions
Comparing each of these intervention techniques:
1.)Regulations v.s. 2.) Taxes
-Are flexible
- Taxes are an incentive
- Firms that can lower
pollution will to lower their
own tax costs.
- Those firms that can’t do
that pay the tax.
- Are inflexible
-Not all businesses are the same
or operate in the same way
and can be regulated the
same.
- Property rights do work well.
In the Real World:
People lie, cheat, steal, and hate paying taxes.
If you make a rule they simply break it. If
you make them pay taxes they will do their
best not to pay them.
41. If Externality is Negative:
1.)Regulations - laws (don’t work)
2.)Taxes - force them to pay
4.) G/Private Solutions
“Internalize the externality” 内部化的外部性
3.) Marketable Permits - are licenses 许可 to emit limited
quantities of pollutants that can
be bought and sold by polluters.
42. How these work:
a.) Each polluter is assigned emission permits that have
a limit.
P to
clean up
Q of clean
up
MC
b.)Firms can buy and sell
the permits as needed.
c.)Those that have low
marginal costs of reducing
pollution can sell them to
high marginal cost firms.
4.) G/Private Solutions
3.) Marketable Permits
P to
clean up
Q of
cleanup
MC
Low cost clean up High cost clean up
43. Firm A and Firm B run coal-burning power plants.
Each emits 40 tons of sulfur dioxide (pollution) per month.
Total emissions 排放量 : - 80 tons/month.
Goal: - Reduce SO2 emissions 25%, to 60
tons month
Cost of reducing emissions:
- $100/ton for Firm A
- $200/ton for Firm B
Example:
3.) Marketable Permits
44. Example:
3.) Marketable Permits
Firm B
Firm A
- Emits 40
tons of
SO2
- Emits 40
tons of
SO2
- Cost
$100/ton
to clean
- Cost
$200/ton
to clean
Policy option 1: Regulation
Every firm must cut its emissions 25% (10 tons).
So the result is:
Each firm must reduce emissions by 10 tons.
Cost of reducing emissions:
$100/ton for Firm A
$200/ton for Firm B
Cost of achieving goal with this policy:
Cost to Firm A: (10 tons) x ($100/ton) = $1000
Cost to Firm B: (10 tons) x ($200/ton) = $2000
Total cost of achieving goal = $3000
45. Example:
3.) Marketable Permits
Firm B
Firm A
- Emits 40
tons of
SO2
- Emits 40
tons of
SO2
- Cost
$100/ton
to clean
- Cost
$200/ton
to clean
Policy option 2: Tradable pollution permits
Initially, Firm A and Firm B each emit 40 tons SO2/month.
Goal: reduce SO2 emissions from 80 to 60 tons/month total.
a.)Issue 60 permits, each allows one ton SO2 emissions.
Give 30 permits to each firm.
b.) Establish market for trading permits.
c.) Each firm may use all its permits to emit 30 tons,
may emit < 30 tons and sell leftover permits,
or may purchase extra permits to emit > 30 tons.
- 给 30
permits
- 给 30
permits
46. Goal: reduce emissions from 80 to 60 tons
Cost of reducing emissions:
$100/ton for Firm A
$200/ton for Firm B
Cost of achieving goal:
Firm A
uses 20 permits, emits 20 tons SO2
spends $2000 to reduce emissions by 20 tons
sells 10 permits to Firm B for $150 each, gets $1500
net cost to Firm A: $2000 - $1500 = $500
continued…
Example:
3.) Marketable Permits
Firm B
Firm A
- Emits 40
tons of
SO2
- Emits 40
tons of
SO2
- Cost
$100/ton
to clean
- Cost
$200/ton
to clean
- 用 20
permits
47. Goal: reduce emissions from 80 to 60 tons
Cost of reducing emissions:
$100/ton for Firm A
$200/ton for Firm B
Firm B
buys 10 permits from Firm A, spends $1500
uses these 10 plus original 30 permits, emits 40 tons
spends nothing on abatement 减排 ( lowering of pollution)
net cost to Firm B = $1500
Total cost of achieving goal = $500 + $1500 = $2000
Using tradable permits, goal is achieved at lower total
cost and lower cost to each firm than using regulation.
Example:
3.) Marketable Permits
Firm B
Firm A
- Emits 40
tons of
SO2
- Emits 40
tons of
SO2
- Cost
$100/ton
to clean
- Cost
$200/ton
to clean
- 用 20
permits
- 送给 10
permits
- 用 40
permits
48. P to clean up
Q of clean up
MC
Low cost clean up
This is cleans up
enough for both
factories and the total
cost is cheaper!
P to clean up
Q of clean up
MC
High cost clean up
49. Objections to the Economic Analysis of Pollution
Some politicians 政治家, many environmentalists 环保主
义者 argue that no one should be able to “buy” the right
to pollute, that you cannot put a price on the
environment.
However, people face tradeoffs. The value of clean air &
water must be compared to their cost.
The market-based approach reduces the cost of
environmental protection, so it should increase the
public’s demand for a clean environment.
50. Comparing each of these intervention techniques:
2.) Corrective Taxes v.s. 3.) Tradable Pollution Permits
4.) Government/Private Solutions
A tradable permits
system restricts the
supply of pollution
rights, and has the same
effect as the tax.
A corrective tax
raises this price so it
reduces the quantity
of pollution firms
demand.
When policymakers do not know the position of this
demand curve, the permits system achieves pollution
reduction targets more precisely.
Like most demand curves, a firms’ demand for the ability to pollute is
a downward-sloping function of the “price” of polluting.
Catch more bees with honey then with vinegar 肉包子打狗
52. Make offenders pay the
government or each
other to decrease
production
If Externality is Negative:
1.)Regulations - laws (property rights)
2.)Taxes - force them to pay
3.)Marketable Permits - trading rights
4.) Government Solutions
“Internalize the externality” 内部化的外部性
53. Regulation that works:
Property Rights
4.) Government Solutions
- Legally established titles to the
ownership, use and disposal of
factors of production and goods and
services that are enforceable in the
court of law.
54. P
Q
MB
P
EQ
External
cost
MSCS = MC + Tax = MSC
EQ is at MSC = MB
The ideal tax is =
to external costs
( MEC )
Tax amount
4.) Government Solutions
Also can be called:
- Corrective Tax
- Pigouvian Taxes
2.)Taxes
55. How these work:
a.) Each polluter is assigned emission permits that have
a limit.
P to
clean up
Q of clean
up
MC
b.)Firms can buy and sell
the permits as needed.
c.)Those that have low
marginal costs of reducing
pollution can sell them to
high marginal cost firms.
4.) G/Private Solutions
3.) Marketable Permits
P to
clean up
Q of
cleanup
MC
Low cost clean up High cost clean up
58. If Externality is Positive:
1.)Patent and copyrights - monopoly power
2.)Vouchers - money to consumers
3.)Subsidies - money to producers
4.)Public Provision - government builds it
consumers pays some
Government pays
the difference
to increase
production
Make offenders pay the
government or each
other to decrease
production
If Externality is Negative:
1.)Regulations - laws (property rights)
2.)Taxes - force them to pay
3.)Marketable Permits - trading rights
4.) Government Solutions
“Internalize the externality” 内部化的外部性
59. 3.) Subsidies - Payment by the government to producers to
pay some of their costs.
4.) Government Solutions
60. 3.)Subsidies
P
Q
P
EQ
MSB
Pd
MB
MC
EQ is determined by
MC = MSB
Subsidy is the amount
of MEB at given EQ
Since subsidy is given
directly to producer it
shifts their curve
down.
MC with
subsidy
4.) Government Solutions
61. 4.) Public Provisions - Production of a good or service by a
public authority that receives most of
it’s revenue from the government.
4.) Government Solutions
62. 4.)Public Provisions
P
Q
P
EQ
MSB
Pd
MB
MC
EQ is at MC = MSB
Public Provision pays
the amount of MEC
and consumers pay
the rest were it
crosses the MB
curve.
Paid by tax
payer
This is the price
consumers pay
4.) Government Solutions
Paid by
consumer
63. CIE exams are missing one solution that is commonly discussed in
AP exams and involves one of my personal all time favorite
economic thinkers…
Private Solutions
The Coase Theorem
How people can fix these problems on
their own without government regulation
or control as long as property rights are
understood
Ronald Harry Coase
December 1910 ( died age - 102 )
64. Ian’s Textbook definition:
Be a nice fucking person, think of others feelings, obey the law, (the
good ones) don’t fuck up the planet anymore, don’t cheat, don’t lie, don’t
steal, don’t kill, pay for your shit - all of it, don’t litter, don’t do bad
things, think before you act, pay the fuck attention to what you are doing,
(and what you are not doing) fuck rich people that aren’t nice, don’t
waste food, recycle, reuse stuff, grow a garden, share with others, realize
not all Japanese people are bad, learn from your mistakes, ( and help
others to do it too) give your teacher some money, always bring you
glasses to class and get a haircut.
Easier definition
Don’t be an asshole and things can work out.
Private Solutions
67. P
Q
P
Deadweight
loss occurs
for society at
MPB.
The marginal cost
incurred by the
entire society –
everyone – the
people that
produce it and all
other third parties
affected by it
EQ
MSC
MC
MB=MPB
P1
EQ1
Negative Externalities
68. P
Q
P
EQ
MC
MSB
P1
EQ1
MB = MPB
The MPB production
point is not
efficient from a
societal view, not
enough is
produced.
MC = MSB
is the efficient
production point from
a societal view.
Positive Externalities
70. If Externality is Positive:
1.)Patent and copyrights - monopoly power
2.)Vouchers - money to consumers
3.)Subsidies - money to producers
4.)Public Provision - government builds it
consumers pays some
Government pays
the difference
to increase
production
Make offenders pay the
government or each
other to decrease
production
If Externality is Negative:
1.)Regulations - laws (property rights)
2.)Taxes - force them to pay
3.)Marketable Permits - trading rights
4.) Government Solutions
“Internalize the externality” 内部化的外部性
71. Some important vocabulary to add…
Property Rights Legally established titles to the
ownership, use and disposal of
factors of production and goods
and services that are
enforceable in the court of law.
I have not talked very much about
property rights
But I want to stress that property
rights are extremely important
for people and go a long way to
solving problems of
externalities.
72. P
Q
MB
P
EQ
External
cost
MSCS = MC + Tax = MSC
EQ is at MSC = MB
The ideal tax is =
to external costs
( MEC )
Tax amount
4.) Government Solutions
Also can be called:
- Corrective Tax
- Pigouvian Taxes
2.)Taxes
73. How these work:
a.) Each polluter is assigned emission permits that have
a limit.
P to
clean up
Q of clean
up
MC
b.)Firms can buy and sell
the permits as needed.
c.)Those that have low
marginal costs of reducing
pollution can sell them to
high marginal cost firms.
4.) G/Private Solutions
3.) Marketable Permits
P to
clean up
Q of
cleanup
MC
Low cost clean up High cost clean up
74. 3.)Subsidies
P
Q
P
EQ
MSB
Pd
MB
MC
EQ is determined by
MC = MSB
Subsidy is the amount
of MEB at given EQ
Since subsidy is given
directly to producer it
shifts their curve
down.
MC with
subsidy
4.) Government Solutions
75. 4.)Public Provisions
P
Q
P
EQ
MSB
Pd
MB
MC
EQ is at MC = MSB
Public Provision pays
the amount of MEC
and consumers pay
the rest were it
crosses the MB
curve.
Paid by tax
payer
This is the price
consumers pay
4.) Government Solutions
Paid by
consumer
