1、11.5 Welfare Analysis with ExternalitiesqAn externality arises when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect. qIf the impact on the bystander is adverse, it is called a negative externality. q If

2、the impact on the bystander is beneficial, it is called a positive externality.qMarket outcome is different with externalities. PriceQuantitySDThe Market Equilibrium without ExternalitiesePeQMarket SurplusPriceQuantitySDThe Market Equilibrium with a Negative ExternalityePeQMarket SurplusS1PriceQuant

3、itySDThe Market Equilibrium with a Negative ExternalityePeQSocial CostS1PriceQuantitySDThe Market Equilibrium with a Negative ExternalityePeQNet GainS1PriceQuantitySDThe Market Equilibrium with a Positive ExternalityePeQMarket SurplusS2PriceQuantitySDThe Market Equilibrium with a Positive Externalit

4、yePeQSocial BenefitS2PriceQuantitySDThe Market Equilibrium with a Positive ExternalityePeQS2Net Gain11.6 The Impact of a Tax or Subsidy qWhat would happen to the market if the government impose a tax on trade?qWho bear the burden of the tax, sellers or buyers? q Specific Tax: Tax of a certain amount

5、 of money per unit sold.qSubsidy: Payments reducing the buyers price below the sellers price; i,.e., a negative tax. Tax Levied on Sellers or Buyers qSuppose the government impose a tax of t per unit of one goods and collect it from sellers. Given the market price P, the market supply becomesqSuppos

6、e the government impose a tax of t per unit of one goods and collect it from buyers. Given the market price P, the market demand becomes0()()PsS PFt d()()dPD PFt dTax Levied on Sellers or Buyers qThe market equilibrium price can be deduced from the following equation when tax is levied on sellersqTh

7、e market equilibrium price can be deduced from the following equation when tax is levied on buyers10()( )PsdePFt dFdP20()()PsdePFdFt dPTax Levied on Sellers or Buyers qThe relationship between market equilibrium price when tax is levied on sellers and the market equilibrium price when tax is levied

8、on buyers can be deduced as followingqThe market equilibrium quantity when tax is levied on sellers is always equal to the equilibrium quantity when tax is levied on buyers12eePPt12eeQQTax Levied on Sellers or Buyers qTotal surplus produced by the market when tax levied on sellers can be written asq

9、Total surplus produced by the market when tax levied on buyers can be written as0(, )()( , )()( )( , )()PrssddPSP tFt gtPdFgtP d0(, )()( , )()()( , )()PrssddPSP tFgtPdFt gtP dTax Levied on Sellers or Buyers qTotal surplus produced by the market when tax levied on sellers can be written asqTotal surp

10、lus produced by the market when tax levied on buyers can be written as10(, )()( , )()()( , )()PrssddPSP tFt gtPdFgtP d20(, )()( , )()()( , )()PrssddPSP tFgtPdFt gtP dPriceQuantitySDTax Levied on Sellers 0PPriceQuantitySDTax Levied on Sellers S11PPriceQuantitySDTax Levied on Sellers sPS11PSize of Tax

11、PriceQuantitySDTax Levied on Buyers 0PPriceQuantitySDTax Levied on Buyers D11PPriceQuantitySDTax Levied on Buyers D11PbPSize of TaxPriceQuantitySDTax Levied on Sellers sPS11PSize of TaxPriceQuantitySDThe Effect of a TaxsP1PDeadweight LossIncidence of a Tax pFour conditions can be summarized by follo

12、wing four equations:tPPQQPQQPQQsbsdsssbdd)()(PriceQuantitySDImpact of Tax depends on Elasticities sPbP0PtPriceQuantitySDImpact of Tax depends on Elasticities sPbP0PtPriceQuantitySDThe Effects of a Subsidy0PDeadweight LossPriceQuantitySDThe Effects of a SubsidybPBuyer GainPriceQuantitySDThe Effects o

13、f a Subsidy0PDeadweight LossPriceQuantitySDThe Effects of a SubsidysPSeller GainPriceQuantitySDThe Effects of a SubsidysPbPPayment of GovernmentPriceQuantitySDThe Effects of a SubsidysPbPDeadweight LossImpacts of Tax with Externalities qWe will now consider a market where there is an externality.qFo

14、ur classes of economic agents must be taken into account: buyers, sellers, government, environmentqTax or subsidy are not bad thing any more when there are externalitiesPriceQuantitySDThe Market Equilibrium with a Negative ExternalityePeQMarket SurplusS1PriceQuantitySDTax with a Negative Externality

15、ePeQMarket SurplusS1PriceQuantitySDTax with a Negative ExternalitysPS11PGovernment Gain PriceQuantitySDTax with a Negative ExternalitysPS11PMarket Surplus PriceQuantitySDTax with a Negative ExternalitysPS11PSocial Loss PriceQuantitySDTax with a Negative ExternalitysPS11PNet Gain PriceQuantitySDThe Market Equilibrium with a Positive ExternalityePeQMarket SurplusS2PriceQuantitySDSubsidy with a Positive ExternalityePeQMarket SurplusS2PriceQuantitySDSubsidy with a Positive ExternalitysPS21PGovernment LossPriceQuantitySDSubs