Scribd
Upload
68 views13 pages

Chapter 17 - Parkin - PowerPoint

The document discusses externalities, which are costs or benefits from actions that fall on parties not involved in the action. It explains how external costs can lead to market failures through overproduction, while external benefits can cause underproduction. Specific examples of negative externalities like pollution and positive externalities like education are examined. The chapter covers how property rights, taxation, and regulation can help correct these market inefficiencies. The tragedy of the commons is also introduced as an example of overuse of a common resource due to lack of property rights.

Uploaded by

Asande
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
68 views13 pages

Chapter 17 - Parkin - PowerPoint

The document discusses externalities, which are costs or benefits from actions that fall on parties not involved in the action. It explains how external costs can lead to market failures through overproduction, while external benefits can cause underproduction. Specific examples of negative externalities like pollution and positive externalities like education are examined. The chapter covers how property rights, taxation, and regulation can help correct these market inefficiencies. The tragedy of the commons is also introduced as an example of overuse of a common resource due to lack of property rights.

Uploaded by

Asande
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 13

Externalities

Chapter 17

Economics 3ed: Global and Southern African Perspectives © 2020 1


Main ideas
After studying this chapter, you will be able to:

• Explain how externalities arise


• Explain why external costs bring market failure and overproduction and how
property rights and public choices might achieve an efficient outcome
• Explain the tragedy of the commons and its possible solutions
• Explain why external benefits bring market failure and underproduction and
how public choices might achieve and efficient outcome

Economics 3ed: Global and Southern African Perspectives © 2020 2


Externalities in Our Lives
• Externalities are costs or benefits from actions falling on someone who didn’t choose
the action
Negative production externalities
• E.g. Pollution
Positive production externalities
• E.g. Beehives next to orchard
Negative consumption externalities
• E.g. Smoking
Positive consumption externalities
• E.g. Vaccines

Economics 3ed: Global and Southern African Perspectives © 2020 3


Negative Externality: Pollution
Private, external and social cost
• Marginal private cost (MC): cost of producing additional unit of a good/service that is
borne by producer
• Marginal external cost: cost of producing additional unit of a good/service that is
borne by people other than producer
• Marginal social cost (MSC): marginal cost incurred by producer and by society.
o MSC = MC + Marginal external cost

Valuing an External Cost


• Economists use market prices to put a rand value on the cost of pollution

Economics 3ed: Global and Southern African Perspectives © 2020 4


Negative Externality: Pollution

Economics 3ed: Global and Southern African Perspectives © 2020 5


Negative Externality: Pollution
Options for fixing inefficiencies arising
from external costs:
Establish property rights
• Confronts producers with costs of their
actions
• They may respond in two ways:
o Abatement technology: improved
technology to reduce pollution
o Produce less: so as to pollute less
• Property rights lead to efficient market
equilibrium
• Note: Coase Theorem – doesn’t matter
who owns the property rights

Economics 3ed: Global and Southern African Perspectives © 2020 6


Negative Externality: Pollution
Options for fixing inefficiencies arising
from external costs:
Mandate clean technology
• Regulate what my be dumped/emitted
– NEMA
Tax on pollution
• Pigovian taxes: set T = marginal
external cost
Cap-and-trade
• Cap: pollution quota
• Leads to trade in pollution permits

Economics 3ed: Global and Southern African Perspectives © 2020 7


Negative Externality: The Tragedy of the
Commons
Overuse of a common resource, since
users have no incentive to conserve it and
use it sustainably
Unsustainable use of a renewable
resource
• Renewable natural resource:
replenishes itself by birth and growth
of new members
o Used sustainably if rate of use ≤
rate of renewal
Inefficient use of a common resource
• Fishers only face private costs

Economics 3ed: Global and Southern African Perspectives © 2020 8


Negative Externality: The Tragedy of the
Commons
Inefficient use of a common resource
• Fishers only face private costs
• Leads to overfishing

Economics 3ed: Global and Southern African Perspectives © 2020 9


Negative Externality: The Tragedy of the
Commons
Achieving an efficient outcome
• Must confront users with marginal
social consequences of their actions

Property rights
• Can convert some common resources
to private ownership

Production quotas
• Requires monitoring and enforcement

Individual transferable quotas (ITQs)


• Each individual has their own quota,
which can be traded with other
producers

Economics 3ed: Global and Southern African Perspectives © 2020 10


Positive Externalities: Knowledge
Private benefits and social benefits
• Marginal private benefit (MB): benefit received by consuming additional unit of
good/service

• Marginal external benefit: benefit received by consuming additional unit of


good/service, that is received by people other than consumer

• Marginal social benefit (MSB): marginal benefit enjoyed by consumer and by society.
o MSB = MB + Marginal external benefit

Economics 3ed: Global and Southern African Perspectives © 2020 11


Positive Externalities: Knowledge

Economics 3ed: Global and Southern African Perspectives © 2020 12


Positive Externalities: Knowledge
Government actions in market for
external benefits

Public production
• Production is by public authority
• Can lead to bureaucratic over-
spending and under-provision

Private subsidies
• Dependent on level of output
• Same bureaucratic issues as above

Vouchers
• Increase willingness to pay, and so
demand, for item
• Forces producers to complete and
increase standards

Economics 3ed: Global and Southern African Perspectives © 2020 13

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy