Externalities Notes


Overview

  • Tragedy of the Commons and Market Failure

  • - shared resources are rarely shared well

  • - market failure: when the market is not in equilibrium, basically.

    • “principal-agent model”

    • “information asymmetry”

  • - tragedy of the commons: we have a shared resource, people are incentivized to overuse it


The big categories

   ~~ Rival vs Non-Rival

     can it be used by many people?

    - rival: “i can use it and you can’t”

    - non-rival: “we can all use it”



  ~~ Excludable vs Non-Excludable

    Can I stop someone from using it?

    - Excludable: Yes, I can’t stop someone

    - Non-Excludable: No, I can’t stop someone




    Private goods vs public goods

    - Is it mine or is it ourssss


    Private costs vs public costs

    - does someone pay the cost, or does everyone?


    Private benefit vs public benefit

    - does one person benefit or does everyone benefit?


Market failure & the tragedy of the commons

Market failure: when a market does not find an efficient allocation of resources

The Tragedy of the Commons: Occurs when a rival but non-excludable good becomes depleted or ruined

    Cattle grazing on common ground shared by all cattle farmers


Need fees/taxes to account for externalities. KU makes us pay parking fees to fix the roads. This is called internalization, or accounting for the externality.

Shared goods (public goods) are used for private gains/taken advantage of moving us away from equilibrium


Interdependence

Equilibrium is where marginal benefit (demand) = marginal costs (supply)

Coase theorem: as long as we’re negotiating, it’ll work out


DWL in Externalities:

DWL = (Q* - Qe) (Social cost - Private cost)


Externalities arise when:

  1. Social cost =/= Internal cost

  2. Social benefit =/= Internal benefit


Types of Goods

Private goods ( rival, excludable) - personal trainer, personal car, house, clothes

Club goods (nonrival, excludable) - wifi, the rec, college, museums that you have to pay for

Common goods (nonrival, excludable ) - family pass card, iCloud storage, space constraints (public pools, small public bench, the last seat at the movie theater), the free student section

Public goods (Nonrival, nonexcludable) - Smithsonian National Museum, sidewalks, preserves, parks, library, security, the sun, the moon



Coase theorem:

  • if there are clear property rights and no barriers to negotiation, externalities can be internalized and a deal can be made