ECON 335: Externalities

externalities

one individual imposing uncompensated costs/benefits on others

what types of externalities can be imposed (not +ve or -ve)

• physical

  • fiscal

what is the goal when reducing -ve externalities?

to reduce it to social optimum, not eliminate it

what are the two ways of addressing externalities?

• not easy to measure md as it isn’t constant

• shape of msc looks different for every individual

what are some examples of private responses?

• assign and enforce property rights, then let individuals bargain with each other

• mergers

• social conventions

state the coase theorem with all assumptions

if bargaining costs (transaction costs) are low and property rights can easily be assigned/enforced, an independent solution will be achieved independent of who is initially assigned the rights, as long as someone is.

what are the problems with coase ther=orem?

• transaction costs cam be high

• challenges associated with assigning/enforcing property rights

• political feasibility in making the initial allocation of property rights

what are the three public responses to externalities?

• pigouvian tax

• creating a market

• regulation

what are the challenges with pigouvian taxes?

• no way to tell what the ‘optimal’ pigouvian tax is?

• impracticality of implementing individual-specific taxes

graph and label a -ve externality

graph and label a +ve externality

graph and label a private response to a -ve externality

graph and label a pigouvian tax

graph and label a market being created in response to a -ve externality

graph and label a +ve externality in consumption being produced at its social optimum

graph label a pigouvian subsidy