Acemoglu_Micro_3e_Ch09_accessible

Chapter 9: Externalities and Public Goods

Learning Objectives

1. Externalities: Understand the impact of economic activities that have effects on bystanders, exploring both negative and positive externalities and their implications for social welfare.

2. Private Solutions to Externalities: Dive into the mechanisms through which private parties can address externalities, including negotiation strategies and the role of property rights.

3. Government Solutions to Externalities: Analyze various government interventions aimed at correcting market failures that result from externalities, assessing their effectiveness and challenges.

4. Public Goods: Define what constitutes public goods and dissect their properties, exploring how they differ from private goods and the implications they hold for market provision.

5. Common Pool Resource Goods: Identify the characteristics and challenges of common-pool resources, exploring scenarios that demonstrate the risks of such resources being overexploited.

Key Concepts

• Market Failures: Free markets may fail to maximize social surplus due to externalities, public goods, and common pool resources. Understanding these failures is crucial for economic efficiency and social welfare.

• Externalities: Externalities occur when the private benefits and costs of an economic transaction deviate from social benefits and costs, leading to social inefficiencies. Key to understanding market outcomes.

• Public Goods: Goods characterized by being non-excludable and non-rivalrous, leading to unique challenges in funding and provision.

• Common Pool Resources: Resources that are rivalrous but non-excludable, often leading to overuse and depletion issues.

• Government Intervention: Action taken by the government to improve market outcomes when free markets fail, particularly regarding externalities and public goods.

Externalities Overview

• Definition: An externality is an economic activity that results in a spillover cost or benefit affecting individuals who are not directly involved in the transaction, influencing their welfare.

• Examples:

  • Negative Externality: Air pollution from factories adversely affects the health and environment of local communities.

  • Positive Externality: Increased education levels contribute to a more informed and capable society, improving economic output and social cohesion.

Economic Implications of Externalities

• Negative Externality: Often leads to market overproduction, where the marginal social cost exceeds the marginal social benefit, causing deadweight loss to society.

• Positive Externality: Usually results in underproduction, where the output is less than the socially optimal level because the benefits to society are not fully captured by the producer.

• Pecuniary Externality: Refers to market price changes that affect others; for example, an increase in demand for a commodity may raise its price, impacting consumers who do not directly benefit.

Coase Theorem

• Overview: The Coase Theorem posits that if property rights are well-defined and transaction costs are low, private bargaining can lead to an efficient allocation of resources irrespective of the initial assignment of rights.

• Limitations: High transaction costs, unclear property rights, and the presence of multiple stakeholders can hinder effective negotiations and outcomes.

Government Solutions to Externalities

• Command-and-Control Policies: Regulations set by government bodies that directly limit or dictate specific actions to address negative externalities.

• Market-Based Policies: Initiatives that create economic incentives for firms to internalize externalities, such as:

  • Pigouvian Tax: A targeted tax designed to correct the negative external effects by making the producer accountable for societal costs.

  • Pigouvian Subsidy: Financial incentives aimed at encouraging consumption or production of goods that generate positive externalities for society.

Public Goods

• Characteristics:

  • Non-excludable: It is not feasible to exclude individuals from using the good, which often leads to funding challenges.

  • Non-rivalrous: One person's usage does not reduce the availability for others, maintaining a shared benefit.

• Free Rider Problem: Arises when individuals have no incentive to pay for the non-excludable goods, leading to underfunding and potential collapse of provision.

• Examples: National defense, public parks, and street lighting represent classic public goods where private sector provision may fall short.

Types of Goods Overview**

• Rival vs Non-rival: Rival goods cannot be simultaneously consumed by multiple users (e.g., food items), while non-rival goods can be enjoyed by many at once (e.g., clean air).

• Excludable vs Non-excludable: Excludable goods require payment for consumption (e.g., cable television), while non-excludable goods do not require payment and are accessible to all (e.g., public parks).

Common Pool Resource Goods

• Tragedy of the Commons: The phenomenon where common resources are overused and depleted due to individual exploitation without regard for collective interests.

• Solutions: Strategies include implementing private ownership structures, regulatory measures, or taxation designed to manage and preserve resource use effectively.

Evidence-Based Economics Examples

• Addressing Earthquakes in Oklahoma: Studies examining policy responses to natural disasters linked to production activities, highlighting the necessity for prosperous regulatory frameworks.

• Impact of Government Regulation: Insights into how command-and-control measures and market-based regulations help guide behavior to optimize social benefits, illustrating the essential role of government in market economies.