Micro economics chapter 13 (Public goods and externalities)

What is a pure public good?

A pure public good is a type of good that is both non-excludable and non-rivalrous, meaning that individuals cannot be excluded from its use, and one person's use does not diminish the availability for others.

What does non excludable mean?

Non excludable refers to a characteristic of a good or service where individuals cannot be effectively excluded from using it.

What does non rivalrous mean?

Non rivalrous refers to a characteristic of a good or service where one person's use does not reduce its availability to others.

What does private goods mean?

Private goods are products that are both excludable and rivalrous, meaning that individuals can be prevented from using them and one person's consumption of the good reduces the amount available for others.

What are quasi-public goods?

Goods for which excludability and rivalry apply only to a limited extent

What are club goods?

Club goods are products that are excludable but non-rivalrous, meaning that access can be restricted to certain individuals, but one person's use does not significantly reduce the availability for others.

What are commons?

Their consumption is rivals but it’s prohibitively expensive to exclude people from consumption. Ex. Fishing in international waters

What is the marginal social willingness to pay?

The marginal social willingness to pay is the maximum amount that society as a whole is willing to pay for an additional unit of a good or service, reflecting the overall benefits to all individuals.

What is the pareto efficient level of provision of a public good?

The pareto efficient level of provision of a public good is achieved when the total benefits to society from the public good are maximized. At this level, the combined willingness to pay of all individuals equals the cost of providing the good, meaning resources are allocated in a way that no individual can be made better off without making someone else worse off. This occurs when the marginal cost of providing the good is equal to the marginal social benefit derived from it. As a result, any attempt to increase the provision beyond this level would result in costs outweighing the additional benefits, leading to inefficiencies.

What is the optimal supply of a private good?

The optimal supply of a private good occurs at the quantity where the marginal cost of producing the good equals the marginal benefit to consumers, resulting in an efficient allocation of resources.

What is a free rider?

A free rider is an individual or entity that benefits from a good or service without contributing to its cost, often leading to underfunding or depletion of resources that are available for public use.

What problem does the non-excludability of a public could lead to?

Free rider Problem

What problems are there in governments choosing public goods?

• It’s difficult to determine the optimal level of the public good.

• people do not value the public good could also pay for through taxes

• policy makers do not always pursue the public interest.

When do external effects or externalities arise?

When the behaviour of the economic agents directly affects other economic agents without paying full compensation through the market

What are the two ways to estimate external effects?

1. Stated preference method estimate the value of a good by asking people to report their willingness to pay in a survey. Interviewees are confronted with hypothetical rather than existing situations

2. revealed preference method inferred the value of a good from observed behaviour in regular markets . Ex. When its estimated the external cost by odor distance from factory They find out houses subject a severe nuisance were up to 12% cheaper compared to similar houses that did not experience odour nuisance.

Do marginal costs reflect all costs a situation with externalities

No, costs associated with pollution are external to the producer. They are not born by the producer and therefore not taking into account when determining the profit maximising output level.

What is the marginal social cost?

The marginal social cost is the total cost to society of producing one additional unit of a good or service, including both the private cost borne by the producer and any external costs imposed on third parties.

What is the marginal social benefit?

The marginal social benefit is the additional benefit to society from consuming one more unit of a good or service, incorporating both the private benefits to the consumer and any external benefits to third parties.

What are emission standards?

Emission standards are legal limits set by governments on the amount of pollutants that can be emitted from specific sources, such as vehicles and industrial plants, to protect air quality and public health.

What is the equimarginal cost principle?

The equimarginal cost principle states that resources should be allocated in a way that the marginal cost of production is equal across all products or services, ensuring that the most efficient production combination is achieved.

What are pigouvian taxes?

Pigouvian taxes are taxes imposed on activities that generate negative externalities, such as pollution, intended to correct the market outcome by aligning private costs with social costs.

What are output taxes?

Output taxes are taxes imposed on the sale of goods and services, based on the quantity sold or the revenue generated, intended to discourage production and consumption of certain goods.

What are emission taxes?

Emission taxes are taxes levied on the amount of pollutants that a company emits, aimed at reducing environmental harm by incentivizing businesses to lower their emissions.

Under which will the consumers price rise output taxes or emission taxes?

Both

What is the European emissions trading system (ETS)?

The European emissions trading system (ETS) is a market-based approach used to control pollution by providing economic incentives for reducing greenhouse gas emissions. It operates on a cap-and-trade system, where a cap is set on the total amount of greenhouse gases that can be emitted by all participating installations. Companies are allocated or can purchase emission allowances, which they can trade with one another. If they reduce their emissions below their allowances, they can sell the surplus to other companies. The ETS aims to encourage companies to invest in cleaner technologies and reduce their overall emissions, ultimately contributing to the EU's climate goals and promoting sustainable economic growth.

What are the differences between emission trading system and emission taxes?

• emission trading systems and emissions taxes both lead to a cost efficient distribution of effort.

• If tradable emission permits are distributed for free by the government then there is no revenue for the government in contrast with an emission tax

• with emission permits the quantity of emissions is fixed in advance but the price is uncertain.

• With an emission tax the price of polluting is clear in advance, but the final amount of emissions is uncertain.

Why did the European emissions trading system initially struggle with very low Prices

• There was a surplus of emission permits

• successive economic crisis led to a contraction of economic activity

• due to low demand and highly the equilibrium price was low until 2018 much lower than the marginal external cost of CO2 emissions.

Why has the emission price started to rise since 2018?

• The annual number of permits put into the market will be phased out more quickly.

• The rise in gas prices has increased the demand for coal. This has driven up the demand for emission rights due to the higher emission from coal.