externalities

Why is there so much negative externalities?

Individuals do not bear the full consequences of their actions

What are the commons?

1. Rivalrous : scarce (like grass)

2. Non-excludable : anyone can use (anyone can eat the grass)

Two options : add more cattle or maintain the same amount

What is the nash equilibirum?

• both of the animals will eat through the available grass and degrade the commons

  • both agree that they both should add because it will help them

Nash = A , A

What makes tragedy more likely?

• Large group size

  • the more people, the harder it is to agree on rules and sanction behavior

• Lack of communication

  • cannot coordinate, cannot trust

• Absence of clear resource rights

  • not clear who can use it and who can use how much

  • makes it hard to enforce who can use what and how to input rules

What policy prevents tragedy of the commons?

1. Privitization : create property rights

   1. if you degrade your own land, you will immediately realize how bad it is

2. Taxation make using the resource more expensive

3. Subsidies

   1. makes the sustainable choice financially better

4. Straightforward regulation : define and punish overuse

   1. setting clear limits and setting clear punishments

5. Self-organization

   1. resource users themselves can figure it out without having any government step in

How has self-organization worked to stop tragedy of commons?

• showed communities can manage resources without top-down control

• for success..

  • must have locally tailored rules, monitoring, graduated sanctions for rule breaking

IF ALL MET, COMMUNITY CAN AVOID THE TRAGEDY!

What is Garret Hardin famous for?

• He had intellectual influence and coned the phrase “tragedy of the commons”

What was Garret Hardin wrong about?

• mischaracterized historical commons

  • made it seem like things were a free for all, but ignored how the community had set boundaries and expectations for one another

• said parents didn’t internalize cost of kids

  • people do factor in cost of having children, why birth rates fall when societies develop

  • He ended up being racist too, adds troubling dimension as he was alarmist

Biodiversity loss with coffee : Tragedy of Commons

• deforested

• lots of small coffee farmers are farming on small plots and just want to make a living

• coffee consumers often look for cheap cofee

What is the externality of coffee farms?

• forest degradation because individual farmer might not feel the full global cost of lost of biodiversity

• coffee drinker doesn’t see direct link of forests being cleared

How to does preservation solve cofee farm dilemma? PES

• Pay farmers to conserve

• What are the logistics? How to know they hold up their end of the bargin and actually give money

How does outlawing coffee farms influence ending tragedy of commons?

• not simple enough as drawing lines on map hasn’t stopped deforesttation

• they need land because they need to supply their livelihoods

How does certify coffee grown sustainably influence ending tragedy of commons?

• gives consumers a way to purchase sustainably sourced coffee

• need trust worthy system to see chain of custody

• consumers need to care enough to pay more

• companies need to actually want to pay more

How does helping make more cofee help ending tragedy of commons?

• if farmers meet income needs, they will feel less pressure to create new land in the forest

  • grow upwards and not outwards

  • reduce need for expansion

• has same challnges as PES

What are the three social dilemmas?

Externalities, Coordination Problems and Commitment Problems

What is an example of an externality?

Tragedy of the commons

Example of Coordination Problem

TP hoarding

Commitment Problems

Prisoner’s Dilemma

What is alturism?

A person who acts selflessly for the benefit of others, often putting others' needs before their own.

If everyone were an altruist…

There would be no need for policy solutions

What do social dilemmas usually lead to?

Pareto Inefficiency

What is an externality?

Spillover effect of how our actions affect the people around us

Positive externality

helps others but person doing action don’t get all the benefits others affected by you may get

negative externality

you harm others but you dont necessarily bare as much harm as everyone else

Do individuals internalize their externalities?

No, they don’t enter the actors payoff

Why are positive externalities undersupplied?

You dont get as good of a

Positive externality with asking questions in class

You get the answer, but will help everyone else who may have not known the answer and you provided information that is useful to everyone else

Positive : representative

taking time to argue for policy can contribute to better outcome even if others dont write themselves. they are still happy

Public Good

1. Non excludable - impossible to stop people from using it even if they havent contributed

2. Non rivalrous- one person using the good doesn’t reduce the amount available for others

Example of public goods

national defense : one person being safe, doesn’t mean others will get less safe

breathing clear air

What is the Nash equillibrium, the individually rational action, and the pareto improvement? Why is it a social dilemma?

1. Nash is 0,0 as when you weigh the payoffs, it is better for each individual player to act in their own self interest

2. L , L is the rational option

3. Pareto improvement is H, H if they were to just work together.

No public good gets made even though everyone would prefer if it could. The freerider problem , why pay the cost if you can get the benefit anyway from someone elses effort?

How can we solve public goods with policy?

• Pursuade

• Boost individual benefit

  • give subsidized or some incentive to make it more rewarding

  • Punishing freeriding if you dont contribute

• Reduce difficulty to act

  • think about donating online vs mailing a check

Negative externality

Spillover effect detracts wellbeing of others, while the actor generates costs that they do not internalize

What is an example of a negative externality antibiotic resistence?

Antibiotic resistence,

• makes medication not work as well.

• Doctor provides medication to make patient happy and it affects others YET the costs are not realized by the doctor

The cost is spread out and delayed. It affects others throughout the community

How do SUVs have a negative externality?

Heavy cars may make roads worse, use more gas

• SUV driver doesn’t pay proportionally more for their road damage

Private choice, external cost

What are the commons and how are the diff from public good?

Non-excludable (anyone can use it)

Commons are rivalrous

How are commons related to space debris?

Commons : low earth orbit

Non-excludable : anyone can launch a satellite

Rivalrous : Not enough space in space, so much space junk Consequence : Every launch increases risk for everyones else satellites, could increase collisions

How are commons related to netflix?

Common : bandwith in apartment

Non-excludable : anyone can use the internet

Rivalrous : streaming 4k movies/downloading games SLOWS down the rest of the household

By streaming 4k, you don’t internalize roommates frustration with slow internet

Consequence. we all stream too much and internet is slow + we grow a dismay for one another

Individual rational choices leave people worse off even if they were to have

What is the tragedy of the commons?

overuse of a shared resource bc of individual incentive , doesn’t align with the public good

How to manage commons?

1. persuasion… often doesn’t work

2. Make the actor internalize the externality (pay the cost that they cost others)

   1. impose taxes on externality behavior (rules and consequences)

How can we deinfluence satellite launches to solve space debris?

• must have satellites deorbited at end of life

• cost to pay per launch that reflects the risk it is towards the commons

collective action problem

individuals contribute too little to common objective because contributions generate a diffuse benefit (positive externality) but require each individual to pay a concentrated cost

collective action

a number of people work together to achieve some common objective

how to model collective action?

actors = N . Pr(success) = n/N Pr(failure) = 1-Prsuccess

If you expeect n others to act, your best reponse is n to also act only if..

(1/N)B >= c (B free ride, N people)

what is a diffuse benefit?

when someone acts, they generate a positive externality/benefit for everyone else

What is concentrated cost?

Because they don’t internalize this benefit to others, they will not act if the marginal benefit doesn’t exceed their individual cost