1、CHAPTER 5,Externalities,Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved.,McGraw-Hill/Irwin,Externalities,Externality An activity on one entity that affects the welfare of another entity in a way that is outside the market mechanism Not an Externality suburban-urban migration ex

2、ample,The Nature of Externalities,Privately-owned versus commonly-owned resources Externalities can be produced by consumers as well as firms Externalities are reciprocal in nature Externalities can be positive Public goods can be viewed as a special kind of externality,The Nature of Externalities-G

3、raphical Analysis,Q per year,$,MB,0,MD,MPC,MSC = MPC + MD,Q1,Q*,Actual output,Socially efficient output,a,b,c,d,f,e,g,h,What Pollutants Do Harm?,Empirical Evidence: What is the Effect of Pollution on Health? What Activities Produce Pollutants? What is the Value of the Damage Done? Empirical Evidence

4、: The Effect of Air Pollution on Housing Values,Bargaining and the Coase Theorem,Q per year,$,MB,0,MD,MPC,MSC = MPC + MD,Q1,Q*,c,d,g,h,The Coase Theorem,Coase Theorem Provided that transaction casts are negligible, an efficient solution to an externality problem is achieved as long as someone is ass

5、igned property rights, independent of who is assigned those rights Assumptions necessary for Coase Theorem to work The costs to the parties of bargaining are low The owners of resources can identify the source of damages to their property and legally prevent damages,Other Private Solutions,Mergers S

6、ocial conventions,Public Responses to Externalities - Taxes,Q per year,$,MB,0,MD,MPC,MSC = MPC + MD,Q1,Q*,c,d,(MPC + cd),Pigouviantax revenues,i,j,Public Responses to Externalities - Subsidies,Q per year,$,MB,0,MD,MPC,MSC = MPC + MD,Q1,Q*,c,d,(MPC + cd),i,j,g,k,h,f,e,Pigouviansubsidy,Public Response

7、s to Externalities- Emissions Fee,0,Pollution reduction,MSB,MC,e*,f*,$,Emissions Fees Continued-Uniform Pollution Reductions,Bartspollutionreduction,Homerspollutionreduction,MCB,MCH,25,f = $50,f = $50,Barts TaxPayment,Homers TaxPayment,Public Responses to Externalities- Cap-and-Trade,Bartspollutionr

8、eduction,Homerspollutionreduction,MCB,MCH,25,f = $50,f = $50,10,a,b,Cap-and-Trade vs. Emissions Fee,0,Pollution reduction,MSB,MC*,e*,f*,$,MC,ef,e,Too much pollution reduction,Too little pollution reduction,Cap-and-Trade v Emissions Fee,0,Pollution reduction,MC*,e*,f*,$,MC,ef,e,MSB,Too much pollution

9、 reduction,Too little pollution reduction,Emissions Fee v Cap-and-Trade,Responsiveness to Inflation Responsiveness to Cost Changes Responsiveness to Uncertainty Distributional Effects Emissions fee Cap-and-Trade Policy Perspective: Addressing Climate Change,Command-and-Control Regulation,Incentive-b

10、ased regulations Command-and-control regulations Technology standard Performance standard Is command-and-control ever better? Hot spots,The U.S. Response,Clean Air Act 1970 amendments Command-and-control in the 70s How well did it work?,Progress with Incentive-Based Approaches,Policy Perspective: Cap-and-Trade for Sulfur Dioxide,Implications for Income Distribution,Who Benefits? Who Bears the Cost?,Positive Externalities,Researchper year,$,MPB,MC,MEB,MS