Econ 13: Ch 14: Negative externalities

What is one type of market failure?

externality -

What’s externality?

the impact of one person’s actions on the well-being of a bystander

When does an externality occur?

an exchange between a buyer and seller has an impact on a third party who’s not part of this exchange

Eg. Environmental damages like air pollution caused by economic production

What’s a spillover?

Externality, aka spillover, can have negative or positive impact on third party

How can we improve market outcomes, in the presence of externalities?

the government

What’s a social cost?

the total cost by society from a particular activity or decision

formula: total cost = Private cost + Social cost

What are private costs?

The cost of production, eg. labor cost, materials, etc.

What’s pollution cost?

cost towards society

What happens if the government forces companies to pay for the pollution cost? W/ tax

The cost of production increases, the supply decreases.

Prices increase, quantity decreases

Ex: If a firm puts a $100 social cost on refrigerators, what happens w/ the supply and demand?

Supply decreases, cost of production increases

quantity supplied decreases, price of good increases

some of the burden of the social cost is given to customers and some taken by producers

What happens when a social cost is imposed on the producers

1. Money is used to help the environment the company is hurting

2. The producers have smaller quality

Both helping the environment

What are two policies towards externalities?

1. Command and control regulations

2. Market-oriented environmental tools

What’s the command-and-control regulation?

set limits to pollution emissions or pollution control tech that must be used

eg. laws that specify allowable quantities of pollution

What was wrong with the command-and-control regulation?

1. no incentive to pollute less

2. offer limited flexibility to where n how pollution will be reduced

3. there’s politically motivated loopholes

What’s market-oriented environmental tools?

provides incentives so that people will solve the pollution problem on their own

What are the 3 tools that the market-oriented environmental tools use?

1. pollution charge

2. marketable permits

3. better defined property rights

What are market oriented policies?

uses taxes, markets, and property rights so that ppl who impose negative externalities will face the social cost

What’s the pollution charge

Tax imposed on the quantity of pollution that a firm emits

If the cost of (preventing) pollution < tax, companies have the incentive to…

companies have the incentive to spend the money to lower the pollution through new technology

If the cost of (preventing) pollution > tax, then companies have the incentive to…

companies have the incentive to continue polluting and just pay the tax

If pollution charge is $1000 per 10 lbs, what pounds of small particles will firms choose to pay the pollution charge or the cost to reduce pollution?

From 10 - 30 pounds, firms should pay the cost to reduce pollution

From 31 - 50 pounds, firms may pay the pollution charge

What is good about the pollution charge,

the pollution charge encourages companies to pay the cost to reduce pollution (to a certain amount of pounds) and whatever they choose to pay for the pollution charge goes towards the government to help the environment.

What are marketable permits?

permit that allows firms to emit a certain amount of pollution

What incentive does Market Permits provide to firms

You can sell your marketable permit, which incentivizes firms to reduce pollution so they can sell non-used permits to other firms and earn more money

Each firm is given a market permit for two years, how much they can produce in one year, and how much they predict they will use in that on year. What happens when a firm exceeds or uses less than what their permit allowed them to. Hence, firm A and D

Firm A & B polluted 50 tons more than they were allowed

Firm C used 100 less than they were allowed

Firm A & B each buy 50 tons of a permit from firm C

What are better defined property rights?

compensate those who were negatively affected by pollution.

All parties negotiate till they reach an agreement on rights and compensation

Why do we need environmental policies?

The benefits of environmental regulations outweigh the costs

What are the benefits of U.S. environmental laws

1. ppl stay healthier n live longer

2. clean air n water

3. value of the properties increases

4. ppl enjoya cleaner environment

What are the costs of U.S. environmental laws

Can be very expensive (billions & trillions)

Why can’t poor countries improve their environmental conditions?

Because they gotta focus first on providing their ppl w/ basic necessities.

What’s the tradeoff between economic output and environmental protection?

higher economic growth & income or higher environmental protection

most countries prioritize production efficiency

A pollution charge gives the trucking industry an incentive to reduce its emissions, as long as the ____________ of reducing the emissions is ____________.

a.

total cost; less than the tax

b.

marginal cost; less than the tax

c.

total cost; equal to the social cost

d.

marginal cost; equal to the social cost

B