Economic Concepts on Externalities and Goods Classification

Correcting for Negative Externalities

  • Definition of Negative Externalities: These are costs that affect a third party who did not choose to incur that cost. Examples include pollution or noise from factories.

  • Social Cost vs. Private Cost:

    • Ssocial: Represents the total cost to society, including both internal and external costs.
    • Sinternal: Represents the costs that the firm incurs directly.

  • Equilibrium Points:

    • Es social optimum: The point where the social cost is balanced with social benefits.
    • QM: Market equilibrium quantity where the internal costs are considered.
    • Deadweight Loss: Occurs due to overproduction, which reducing pollution can eliminate.

  • Key Relations:

    • The shift of the supply curve to the left (reduction in quantity) results from accounting for external costs as firms change their production behavior.

Correcting for Externalities—2

  • Methods to Correct Negative Externalities:

    1. Internalize External Costs: Make firms recognize and account for external costs in their decision-making.
    2. Taxation: Implement taxes on the product to equal the external cost, thus making the price reflect the true cost to society.
    3. Regulation: Enforce production guidelines that limit the external costs in regards to pollution or other harms.
    4. Encourage Alternatives: Promote research and development of substitutes that are less harmful to society.

  • Outcome: These measures ensure that the firm’s costs reflect social costs, leading to a leftward shift of the supply curve.

The Coase Theorem

  • Hypothetical Scenario:

    • Setting: In an elevator, a person lights a cigarette.
    • Confrontation: The observer asks the smoker to stop, but the smoker refuses.
    • Bribe: The observer offers $7 to the smoker for compliance.
    • Value Analysis: If the smoker agrees, his valuation of smoking must be less than $7, but more than $5, which is assumed as his utility from smoking.

  • Property Rights and Bargaining:

    • If property rights are not clearly defined (implied by smoker), then the non-smoker must resort to bribery.
    • If a “no smoking” sign exists, property rights shift to the non-smoker, impeding the smoker's ability to bribe successfully.
    • Conclusion of Coase Theorem: The outcome remains efficient regardless of who holds property rights, as it hinges on the negotiation dynamics.
    • Enforcement of Property Rights: A crucial factor in determining the efficacy of the arrangements.

Scaling the Example with Different Values

  • Redone Scenario: If the value of smoking is assumed to be $9 (instead of $5), the outcome remains efficient as long as the number of negotiators (bargainers) is small, allowing for easier negotiation between parties.

Challenges in Solving Externality Problems

  • Complexity Factors:
    • Large Number of Parties Involved: If multiple individuals are affected, coordination becomes difficult.
    • Public Goods Characteristics:
    • Non-excludable: Cannot prevent others from using.
    • Non-rival: One person's consumption does not reduce availability for others.

Conceptual Experiment on Open Space

  • Scenario Description: A developer is willing to pay $1,000 for land that is valued by 10 home owners at $101 each.

    • Collective Decision: Ideally, the homeowners should buy the land together if the valuation is above the price offered.
    • Valuation Issues: If individual valuations drop to $99, it leads to uncertainty in collective action.

  • Zoning Implications:

    • Determines how land can be utilized; a significant aspect of urban planning and public policy considerations.

Problems with Private Provision of Public Goods

  • Common Issues:
    • Coordination Problems: Difficulty in organizing multiple individuals to act towards a common goal.
    • Free Rider Problem: Individuals benefit from resources without paying, leading to under-provision of goods.

Four Types of Goods

  • Classification of Goods Based on Rivalry and Excludability:
    1. Private Goods (Excludable & Rival): Examples include hamburgers, watches, automobiles.
    2. Club Goods (Excludable & Non-Rival): Examples include satellite television, country clubs.
    3. Common Resource Goods (Non-Excludable & Rival): Examples include Alaskan king crab and congested public roads.
    4. Public Goods (Non-Excludable & Non-Rival): Examples include street performers, national defense, and environmental services.

Club Goods vs. Common Resources

  • Definitions:
    • Club Goods: Goods that are available to a specific group and can serve more than one user without being diminished (non-rival).
    • Common Resource Goods: Goods that can be used by many but are subject to depletion (rival).

Scenario on Beach Usage

  • Question: What type of good is the beach? Examination may relate to properties like opening access to the public, potential overuse, and environmental sustainability. This invites a deeper discussion based on economic principles of public and common goods management.