Econ Pub Policy Midterm 2

Ch 5-8 + special topics 3

Negative Production Externalities + eg.

When a firm’s production reduces the well being of others who are not compensated by the firm (the market produces too much)

• Pollution

• Ppl working in paper mill is benefitting from the high wages, residents who dont work there only get the cost of foul smell and pollution, and no other benefits

Math of Negative Production Externality

Add Marginal External Cost to the supply equation

Negative Consumption Externalities + Eg.

When one person’s consumption reduces the well-being

• smoking

Positive Production Externality + Eg.

When the production of a firm benefits others, but the firm is not being compensated by those others (market produces too little)

• research &D, honey production

Private Marginal Cost (PMC)

Direct cost to producers of producing an add unit of the good

Positive Consumption Externality + eg.

When an individual’s consumption benefits others, but the individuals not compensated by those others

• flu vaccines

• education

Positive Consumption Externality Math

Social Marginal Cost (SMC)

private marginal cost + external marginal cost added tgt

External marginal cost (EMC)

The marginal cost per unit of production done to non-consenting 3rd party members

Tragedy of the Commons

The tendency for self-interested individuals to over-use open access resources

Public Solutions to Externalities

1. Pigouvian Tax

2. Pirgouvian Subsidy

3. Regulating Quantities

Pigouvian Tax

taxing an activity that causes a negative externality by the amount of marginal external cost

Pigouvian Subsidy

 subsidizing an activity that causes a positive externality by the amount of the marginal external benefit

Regulating Quantities

problem is that requires the regulators to know the conditions of the firm, which is unlikely, and regulators can be corrupted in the process of learning that information to regulate the firms.

Coase Bargaining

so long as property rights are well-defined and there are sufficiently low transaction costs, bargaining in a situation involving an externality will lead to an efficient outcome regardless of the initial allocation of property.

When is Coase Bargaining possible

A. Private property rights have to be well-known

B. Transactions costs have to be low

Problems with Coase Bargaining

A. The assignment problem: climate change is not from a single source so who is responsible for it and assigning that

B. The holdout problem: shared ownership of the property rights give each owner power over all of the others:

• eg. if a plant is polluting river costing 100 fisherman $1 each in reduced fish, so the coase solution would be for each fisherman to receive $1 in compensation. Last one of 99 can hold out bc they need him

C. Free rider problem: underinvest when personal cost but common benefit

D. Transaction costs have to be low: even if uk who is responsible, hard to negotiate if large # of firms on transaction

Four Incentives Created by Private Property Rights

1. Use property in ways that benefit others

2. Care for what they own

3. Make sure their property does not damage anybody else’s property

4. Conserve for the future

Private Proprty Rights can protect environment

Africa villagers who would sell hunting licenses to wealthy tourists (or tourism) increase bc they want to keep elephants alive.

Two sides of climate change debate

Left:

• temps on earth increased due to greenhouse gases. few scientists who have explicitely rejected the position that climate change is caused by human activity

Right:

• temp fluctuations have happened thru history, not necessarily bad. not all scientists have concluded humanity is the cause of climate change

Moral Approach

environmental degradation is bc of immoral human behaviour and those who prefer to help the environment at the expense of econ progress are good, while opposite are evil

Economic Approach (environmental policies)

explores environmental issues from the standpoint of competing preferences, cost benefit analysis, analytical models

Assimilative Capacity

The ability of the natural system to accept a certain amount of pollutants and render them benign or inoffensive.

There might be an optimal amount of pollution that is non-zero… especially given the earth’s assimilative capacity. (like getting plane crashes to zero)

(so environment too)

Emission Damage Function

the connection bw the residual emitted from a source or group of sources and the resulting damage

Ambient Damage Functions

Relationship bw the concentration of particular pollutants in the surrounding environment and the resulting damaged

• all the past emissions

• look at the damage caused by overall change in air quality

Abatement Costs

cost of reducing the quantity of residuals being emitted into the environemtn, or of lowering ambient concentrations

Marginal abatement costs

the added cost of reducing one unit of emission level or ambient concentration

Marginal Damage Costs (MDC)

The extra harm of a unit change in emissions or ambient concentration

What can shift the MDC

• diff in population exposed (tokyo vs small town - more ppl affected)

• diff time period/meterological activity

• new scientific estimates of increased pollution impact

Total pollution cost

Total damage costs + total abatement costs

Enforcement costs (E)

the cost of resources that must be dedicated to enforcing abatement

• private costs: such as record keeping by the polluters

• public costs: various regulatory aspects for enforcement

Government allocate permits ways

1. Give permits to higher abatement costs (rewards dirtiest players)

2. Give permits to the newest firms (but usually they have tech and dont need them)

3. allocate permits thru auctions (bigger firms to buy)

Ways Cigarettes are negative externality

1. Increased Healthcare costs

2. Less productive works

3. Start fires

4. Dying earlier (positive externality)

5. Secondhand smoke

Negative Internality

Damage done to oneself through adverse behaviour that is not fully accounted for when decision in the adverse behaviour

Cigarette Smoking Problem (Gov)

Gov Action For

• externalities

• negative internality

• Tools: 10% price increase = 5% decrease and info abt health risks of cigs
  
  No gov action Against

• not an externality if market alrdy prices it in (insurers rasie price for smokers, employers adjust wages, smokers fire only hurt their own property)

• earlier deaths = positive externality

Alcohol consumption

For gov action:

• impaired driving 2019 30% of traffic death, 55% of violent crimes, 2/3 victims attakacked by partners attakcer had been drinking

• age 21 before and after academic falls, work less, crime rise at 21

Against Gov action:

• if you’re too young to drink, why can u vote, student loans, go to war (autonomy)

Drug Use

For gov action:

• drug overdose risen, driven by fentanyl and opioids

Against Gov action:

• some economists argue the negative external effects is BC DRUGS ARE ILLEGAL

Obesity

For gov action:

• obse 13% from 1960 —> 40% in 2024

  • internal costs (heart, disease, diabetes) and external costs (higher healthcare costs)

• policies: nutrition labels, decrease food deserts, sugar taxes

Alternative solutions

• charge ppl for being obese

• financial incentives (states and employers provide) to go to wellness programs

• provide consumers options to size down

Against Gov action:

• autonomy?

Costs of legalizing drugs & prostitution

• drugs r easier to get, more ppl will use, less productive society

• prostitution easier, more ppl use it, less productive society, increased human trafficking

Benefits of of legalizing drugs & prostitution

• safer/less potent drugs, less crime, better use of police resources, less police corruption, increased tax revenue

• safer prostitution, less crime/violence in prostitution trade, increased tax revenue, better use of police

Public goods have to be

1. Non-rival in consumption

2. Non-excludable

Pure vs Impure Public goods

Private goods

goods that are both rival in consumption and excludable

Demand for private goods

Horizontal sum of all individual demand curves (quantities demanded at the same price)

Demand for public goods

Vertical sum of all the individual demand curves (sum of prices ppl r willing to pay at the same quantity received by everyone)

Free Rider Problem

when an investment has a personal cost but a common benefit, individuals will underinvest

• eg. Met in NYC, firefighters in australia

Pure Public Goods:

both non-rival in consumption and non-excludable

eg. national defense

Impure public good

You can exclude ppl from using it, but one person using the internet does not stop

Lindahl pricing

An approach to financing public goods in which individuals honestly reveal their WTP and gov aggregates these preferences then charge that amount to finance the public good

Problems with Lindahl Pricing

1. ppl are incentivied to lie abt their WTP to try to free ride

2. even if they are honest, no idea how to value public good (Eg. national defense)

3. honest and knowledgeable, have to aggregate each individual —> social value

Private Provisions of Public Goods (fix free rider problem)

1. Coase Bargaining/ private agreements: a private contract that forces everyone to contribute (HOA)
   - transaction costs have to be low and agreements have to be enforceable

2. Public good can be tied to a private good
   - this is not always possible in every circumstance

3. Indi care more about providing public good than others
   - unlikely to solve it

4. Altruism: indi value benefits and costs to others in making their consumption choices (we know altruism exists).

5. Warm glow model: indi care abt both total amount of public goods and their particular contributions as well

Social Capital

The value of altuistic and communal behaviour in society

Obstacles to public provisions of public goods

1. Crowding out:

Lab evidence

Real world evidence

2. Government lacks the knowledge to provide the socially optimal quantity of the public good
   - it is difficult to measure costs and benefits
   - can’t measure preferences for public goods

Contracting out

Mix Private and public provision contracting out: provide good or service but hires a private sector firm to do it (incenties dont align and not competitive bc connections)

Opportunity Cost of Goods

The next best use for a good, besides using it on this project, is to sell it to someone else. So, the opportunity cost of using it for a project is the market price of the input. (in a competitive market equilibrium, price equals marginal social cost)

Discount Rate

7% is the avg rate of return of stock market

Measure Benefits of time saved

1. Producers

2. Consumers (market based vs survey based)

Market Based Measures to Value time

value of time at work can be measured as wage rate in a perf competitive labour market

• cant freely trade leisure and hrs of work

• non-monetary aspects of the job that cause ppl to value it diff than wage

Survey Based Measures to Value Time:

Asking individuals to value an option that they are not now choosing, do not have the opportunity to choose, or that is not yet available to them.

• isolation of issue matters

• order of issues matters

• embedding effect

Using Revealed Preferences to Value Time:

Letting the actions of individuals reveal their valuation.

Economically measure the value of lives saved

1. lifetime wages

2. contingent valuation (ask indi what their life is worth)

3. Revealed preferences (how much paid to switch riskier job)

Common mistkaes in cost-benefit analysis

1. counting secondary benefits

2. counting labour as benefit (but it is cost)

3. double counting benefits (saving time —> other benefits)

4. ignoring unseen (secondary costs and effects)

Good Regulation

Railroad safety act: innovations like air brake, reduced injury and death, improving profitability

Bad Regulation

limit lease period for taxicab companies forced taxi companies to limit their lease periods from 24 —> 11 hrs. This resulted in lower profitability of taxi-cab industry, fewer cabs = lower service = increase # at fault accidents —> more assault bc cant get taxis

Minimum wage

• paid more

• increase unemployement, particular teenagers/underrepresented groups (= more crime)

American disabillities act

Helps to enforce accommodations for workers with disabilities, but

also resulted in a decline in employment of workers with disabilities among midsized companies who can’t or won’t pay for the accommodations. (like building an elevator they cant afford)

Occupational Licenses

Can increase quality and safety for the consumer, but often reduces competition.

Sunset provisions on regulations:

Causes a law or regulation to cease to be effective after a certain date unless further legislative action is taken to extend it.

A. Costs: potential for good laws to be amended to serve current administration, requires more taxpayer resources

B: Benefits: allows for the law or regulation to be reviewed using the info gained during the OG tme the law is in place