Lecture 10 Notes - Econ 101 Introduction to Microeconomics...

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Unformatted text preview: Econ 101 Introduction to Microeconomics Professor Richard V. Burkhauser 10 Externalities Key Concepts Externality, p. 204 Internalizing an externality, p. 207 Coase theorem, p. 210 Transaction costs, p. 211 Pigovian tax, p. 213 Econ 101 Professor Burkhauser Figure 10.1 Pollution and the Social Optimum Price of Aluminum Cost of pollution Social cost Supply (private cost) Optimum Equilibrium Tax Demand 0 QOPTIMUM QMARKET Demand (private value) Quantity of Aluminum Question 10.1: Beneficiaries of a Pollution Tax The major beneficiaries of a tax on the output of sulfur dioxide in the production of plastic dolls are: consumers of dolls producers of dolls workers in doll factories those who value clean air a) b) c) d) Econ 101 Professor Burkhauser Question 10.2 Market for Pollution Cost of Eliminating The table below gives the cost schedule for reducing sulfur dioxide emissions: Firms A First unit Second unit Third unit Fourth unit B $200 $400 $600 $700 C $500 $550 $700 $900 D $800 $1,000 $2,000 $4,000 $100 $200 $300 $600 Econ 101 Professor Burkhauser Question 10.2 (continued) If the federal government wanted to reduce pollution from 16 to 12 units, it should charge a pollution fee of: a. b. c. d. e. $250 $350 $650 $950 $1,050 Econ 101 Professor Burkhauser Question 10.3 Market for Pollution Cost of Eliminating The table below gives the cost schedule for reducing sulfur dioxide emissions: Firms A First unit Second unit Third unit Fourth unit B $45 $55 $70 $90 C $45 $70 $90 $100 D $30 $50 $80 $110 E $70 $80 $90 $100 $50 $60 $70 $85 Econ 101 Professor Burkhauser Question 10.3 (continued) If the federal government wanted to reduce pollution from 16 to 11 units, it should charge a pollution fee of: a. b. c. d. e. $31 $46 $52 $61 $76 Econ 101 Professor Burkhauser Figure 10.2 Market for Pollution $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 Difference between the marginal benefit and marginal cost of the 16th unit of pollution. MC to society of pollution MB to firm of polluting $0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 If firms do not bear the cost of the pollution they produce, they will generate 16 units of pollution. Is this optimal? No, because the marginal cost to society of the 16th unit of pollution is greater than its marginal benefit. Figure 10.3 Is zero pollution optimal? $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 Difference between the marginal benefit and marginal cost of the first unit of pollution. MC to society of pollution MB to firm of polluting $0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Is zero pollution optimal? No, because the marginal cost to society of the first unit of pollution is smaller than the marginal benefit from the first unit of pollution. What is the optimal amount of pollution? Figure 10.4 Optimal Amount of Pollution $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $600 $0 1 2 3 4 5 6 7 8 MC to society of pollution MB to firm of polluting 9 10 11 12 13 14 15 16 The optimal amount of pollution is found by equating the marginal cost of pollution to the marginal benefit. Any more pollution than this amount would create more costs than benefits to the society. Figure 10.5 How to Achieve the Optimal Amount of Pollution $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $600 $0 1 2 Set the supply of pollution permits at the optimal level. MC to society of pollution MB to firm of polluting 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Or, set the pollution fee at the optimal level Market for Pollution: Optimal Allocation of Pollution across Firms Cost schedule for eliminating sulfur dioxide emissions: Cost of Eliminating Firms A $100 $200 $300 $600 1 B $200 $400 $600 $700 2 C $500 $550 $700 $900 2 D $800 $1,000 $2,000 $4,000 4 First unit Second unit Third unit Fourth unit Optimal amount of pollution: Econ 101 Professor Burkhauser Question How should the government assign propert rights to arrive at the efficient allocation? Econ 101 Professor Burkhauser The Coase Theorem The Coase Theorem is a proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own. Transactions Costs Transaction costs are the costs that parties incur in the process of agreeing to and following through on a bargain. Econ 101 Professor Burkhauser Question 10.4 Market for Pollution Per Unit Cost of Eliminating The table below gives the cost schedule for Sulfur Dioxide Emissions.: Firms A $50 $60 $70 $85 B $45 $55 $75 $90 C $45 $65 $90 $100 D $30 $50 $80 $110 First unit Second unit Third unit Fourth unit Econ 101 Professor Burkhauser Question 10.4 (continued) If the Federal Government wanted to reduce pollution from 16 units to 9 units, it should charge a per unit pollution fee of: $46 $56 $63 $73 76 Econ 101 Professor Burkhauser a) b) c) d) e) Question 10.5 Market for Pollution Cost of Eliminating The table below gives the cost schedule for reducing sulfur dioxide emissions and allocation of pollution rights: Firms A $100 $200 $300 $600 3 B $200 $400 $600 $700 2 C $500 $550 $700 $900 2 D $800 $1,000 $2,000 $4,000 2 First unit Second unit Third unit Fourth unit Right to pollute Econ 101 Professor Burkhauser Question 10.5 (continued) If Firm A were initially given pollution rights for 3 units, and B, C, and D were each given rights for 2 units, what trades would be made if the right to pollute were a tradable good? A would trade 1 unit to B, 1 unit to C, and 1 unit to D. A would trade 1 unit to C, and 1 unit to D. A would trade 2 units to D. A would trade 2 units to B, and 1 unit to C. No trades would take place. Econ 101 Professor Burkhauser a) b) c) d) e) For next time ... Reading assignments on the course web site: Course Documents => Reading Assignments => Court Cases How to read court cases like an economist Lochner v. New York Muller v. Oregon Life of Florence Kelly Econ 101 Professor Burkhauser How to Read a Supreme Court Case Like an Economist This is an introductory economics course, not a law school course, so focus on how economic ideas are used by lawyers (very smart lawyers). In reading these cases consider the following questions: 1. What are the facts of the case? 2. What is the key issue or issues on which the case turns? That is, of the many issues raised, which issue is critical to the decision? 3. What is the central argument used to justify the majority opinion? 4. What is the central argument used to justify the minority opinion? 5. What are the economic consequence of the decision? Behavioral Income distributional Efficiency versus equity Short-run versus long-run 6. What makes the "appropriate" decision? Why? Why not? Econ 101 Professor Burkhauser ...
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This note was uploaded on 12/08/2007 for the course ECON 1110 taught by Professor Wissink during the Fall '06 term at Cornell University (Engineering School).

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