perloff_0321374584_IM_Part1_C18

perloff_0321374584_IM_Part1_C18 - Chapter 18 Externalities...

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Chapter 18 Externalities and Public Goods ± Chapter Outline 18.1 Externalities 18.2 The Inefficiency of Competition with Externalities Supply-and-Demand Analysis Cost-Benefit Analysis 18.3 Market Structure and Externalities Monopoly and Externalities Monopoly Versus Competitive Welfare with Externalities Taxing Externalities in Noncompetitive Markets 18.4 Allocating Property Rights to Reduce Externalities Coase Theorem Markets for Pollution 18.5 Common Property Overuse of Common Property Solving the Commons Problem 18.6 Public Goods Types of Goods Markets for Public Goods Reducing Free Riding Valuing Public Goods ± Teaching Tips Students are often eager to discuss topics related to this chapter. Consumers are constantly confronted with environmental claims made by firms, public interest groups, and the government, but do they not have much information about how to react. If you like, you can cover portions of this chapter in the form of an introduction to Chapter 7 (Cost). While introducing cost in Chapter 7, you will need to note that social costs are excluded, because the simple minimization model includes only private costs. You might take an extra fifteen minutes at that time to talk about the existence of externalities, the problem of the commons, and the way the inclusion of these costs would affect the measurement of cost. You can also introduce the Coase theorem at the intuitive level. Because of the recent trend in firms being “green,” many students have a fairly simplistic view of negative externalities. It is an important point that although competitive markets do produce excessive pollution, the optimal level of pollution is not zero.
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144 Part 1 Teaching Aids It is also important for students to understand the international perspective as it relates to production externalities. Pollution standards vary greatly in different countries, which can create a competitive disadvantage for firms in environmentally conscious countries. If two firms from separate countries compete in the same world market, and have otherwise equal costs, the firm that faces the pollution tax is at a competitive disadvantage. This can be shown by simply comparing the pre-tax and post-tax solutions in Figure 18.2. One of the reasons that NAFTA was so controversial was the claim that Mexico had a built-in cost advantage due to less stringent pollution standards. When discussing the Coase theorem, you might ask the class whether they have rules in their dorms regarding property rights. For example, at most schools, property rights regarding noise pollution are determined by time of day. Between the hours of Midnight and 8 A.M., individuals have the right to quiet. At all other times, individuals have the right to make noise. Although bribes for the right to either have noise or quiet are probably rare, without such rules, noisy and quiet individuals have no basis on which to negotiate a solution. The problems of the commons and the markets for public goods are intuitive and do not take much time to
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This note was uploaded on 04/16/2008 for the course MICROECONO ECON W3211 taught by Professor Dutta during the Spring '08 term at Columbia.

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perloff_0321374584_IM_Part1_C18 - Chapter 18 Externalities...

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