economics- externatilities

externality

externality

positive effect (benefit) or negative effect (cost) for third parties who are not part of a transaction and whose interests are not taken into account; the market fails to achieve allocative efficiency , because marginal social benefits MSB is not equal to marginal social costs MSC

marginal private benefits (MPB)

additional benefits for consumers arising from the consumption of an additional unit of a good

marginal social benefits MSB

additional benefits for society arising from the consumption of an additional unit of a good

marginal private costs MPC

the additional costs to producers arising from production of an additional unit of a good

marginal social costs MSC

the additional costs to society arising from the production of an additional unit of a good

when is there allocative efficiency?

when MSC= MSB

condition at no externalITY

D=MPB= MSB
S= MPC=MSC
market equilibrium when D=S

the socially optimum

shown by Qopt and Popt found with intersection of MSC and MSB

market outcome

Qm and Pm
intersection of MPC and MPB

market failure

allocation of goods are services in free market is not efficient leading to net welfare loss

types of market

common pool resources, externalities, public goods, asymmetric information

common pool resources

natural resources without ownership and not traded in the market, they have no price and can be freely used by anyone.

they are non excludable yet rivalrous

ex forests rivers lakes biodiversity global climate and even the ozone layer

rivalrous

use by one person makes them less available for the use by someone else

non excludable

people cannot be excluded from using them as a price cannot be charged

sustainability

the use of natural resources at a rate that allows them to reproduce themselves , thus resulting in environmental preservation over time

sustainable development

development which meets the need of the present without compromising the ability of the future generations to meet their own needs

threat to sustainabilty

rivalrous and non excludable
The threat arises

because since these resources can be freely used, they may be overused, depleted (= reduced in quantity) and degraded (= reduced in quality).

forest

a forest with no ownership can be used by anyone to chop down trees and used as timber or to cut all trees and use as agricultural products, if trees are chopped quicker than new trees can grow forests become depleted (decrease in quantity) and degraded (decrease in quality) due to loss of natural habittat biodiveristy and global warmining

fish

if fish are fished faster than they can reproduce they become depleted and oceans become degraded as their eco system is distrupted

fossil fuels as a threat to sustainability

fossil fuels create negative production and consumption externalities. deplete and degrade cpr

external costs like climate change depletion of the ozone layer and acid rain and a vast amount of health problems

same graphs as NCE AND NPE can be used

povetry as a threat to sustainability

when surviving on extremely low icnomes cpr are overused as those are affordable

high population growth puts pressure on unsustainable resource use

• Lacking modern energy sources, they also cut down forests to

  obtain firewood. 

• Poor people usually have higher birth rates and higher

  population growth, creating pressures for them to open

  up new lands for agriculture

• With suitable agricultural

  land becoming increasingly scarce, they cut down

  forests (deforestation) in search of new farmland, they

  move to fragile lands in mountains and hills, causing

  soil erosion, and they overgraze animals on pasture

  lands, depleting the nutrients there as well. 

• Poor people lack modern agricultural inputs, and being too poor to

  buy inputs that preserve the soil’s fertility, they deplete

  the soil’s natural minerals, making soils less productive.

negative externaltiies from overuse of cpr

govt responses to threats to sustainability

legislation, regulation, funding for clean tech, carbon taxes, tradeable permits, elimination environmentally harmful subsidies, subsidies for clean tech, international collaboration

legislation

Legislation (laws and regulations) intended to limit threats to sustainability typically involve emissions standards, quotas, licences, permits or outright restrictions.

ex: restrictions in the form of quotas for fishing, quantity of logging, restrictions on emissions from cars, cars must use catalyctic converters

• can immediately put into effect and give effective results like restrctions on car pollutants or logging restrctions

• avoid technical difficulties compared to market based solutions for cutting emmisions

bads

• dont offer incenties to reduce emmisions, increase energy efficiency or give option to switch to alternative fuels

• costs required to monitor and suoervise to detect possible violations

funding for new clean tech

as per world bank, private and public funding for clean tech fall short of what is needed

Disadvantage - Funding for clean technologies clearly has

opportunity costs.

However, given its urgency

governments should make a greater effort to allocate

resources to technological innovations in this area, and should also make efforts to promote private sector funding and participation.

carbon taxes

higher the emmisions, greater the amount of tax paid, thus creating incentives for firms to shift to clean tech. sweden finaldn poland have implemeted

external costs decrease and optimum quanitty of goods increase

cap and trade schemes

maximum amount of pollutant that can be emmited, and distributiing permits to firms to relase the pollutant, permits can be traded in markets

Eliminating harmful subsidies

global subsidies for fossil fuels are 10 times for research and development

govt subsidies to develop clean tech

Governments may provide subsidies to government agencies or private firms that conduct R&D for the development of clean technologies. will increase supply of clean tech and lower their price to buyers of these technologies and at the same time reduce fossil fuels consumed and size of the NPE from themin

international consumption

byeond one countries border and require international cooperatin. ozone layer and climate change are CPRs global issue to each country hence create effective international agreements like the kyoto protocol or the effective international agreements

private goods

 rivalrous and excludable.

public goods

A public good is non-rivalrous and non-excludable. e.g. police force, national

defence, flood control, non-toll roads, fire protection

free rider problem

when people use a good without paying for it, like non excludability

when its not possible to exclude people from using a good by charging a price for it they are taking a “free ride”

why do public goods represent market failure?

Public goods are a type of market failure because due to the free rider problem, private firms do not produce these goods (because they cannot make profit): the market fails to allocate resources to their production.

quasi public goods

goods that are non-rivalrous but are excludable; the free rider problem does not hold because it is possible to exclude users by charging a price. Ex toll roads (whoever is not willing or able to pay the toll will be excluded from its use)

direct provision of public goods by the govt

since markets fail to allocate resources to public goods are they are socially desirable hence governments allocate resources to them they are directly

• provided by the government and financed (paid for) by government tax revenues.

• In view of the opportunity costs of government spending, and the many competing uses of government funds, governments face the difficulties of deciding what particular public goods to provide and in what quantities.

Political pressures on the government may also come into play, resulting in choices made on political rather than economic

private goods

rivalrous and exculadable, includes merit goods and demerit goods, can or cannot have positive and negative externaliies

common pool reosurces

natural resources not owned by anyone, non excludable and non rivalrous

quasi public goofds

non rvialrous but excludable opposite of cpr

public goods

oppsoite of private goods

non rivalrous and non excludable

freerider prob: people use them wihtout paying for them hence produced by govts only

montreal protocol

signed in 1987 and coming into effect in

1989, intended to phase out substances that have

caused depletion of the ozone layer. By 2009, all

member states of the United Nations had ratified

the agreement, and significant progress has been

made

kyoto protocol

contained provisions for

the development of a market of tradable emissions

permits, according to which each participating

country was to be assigned certain pollution

permits which it would be able to trade with other countries

Protocol came under a lot of criticism and has not

been implemented in full. Many environmental

specialists argued that even if it were implemented,

the agreed reductions in emissions were too

small to have sufficient impact on the problem of

global warming.

eu ets

regional

collaborative arrangement is the European Union’s

cap and trade scheme for carbon, known as the

European Union Emissions Trading System (EU ETS),

asymmetric information

when buyers and sellers do not have equal access to information hence results in an underallocation of resorucnes to the production of goods and services

adverse selection

When one party has more information than another and the less informed party inadvertently engages in undesirable transactions

buyers have more than sellers