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Unformatted text preview: Principles of Economics I
Economics 101 Announcements Readings: Chapter 5 this week Discussion Sections this week New assignment available on Ctools this afternoon No quiz Exam 2 March 24th Practice Exam available on CTools No class that day Exam Location
Section # 401 402 403 404 405 407 409 410 411 Section Time Fr 10:00 AM 11:30 AM Fr 11:30 AM 01:00 PM Fr 01:00 PM 02:30 PM Fr 11:30 AM 01:00 PM Fr 01:00 PM 02:30 PM Th 02:30 PM 04:00 PM Th 11:30 AM 01:00 PM Th 04:00 PM 05:30 PM Fr 02:30 PM 04:00 PM GSI Dimitriy Dimitriy Owen Dan Andrew Annika Annika Dan Andrew Exam Room 1800 CHEM 1800 CHEM 1210 CHEM 1210 CHEM 1800 CHEM 1800 CHEM 1800 CHEM 1210 CHEM 1800 CHEM Reading Material for Exam International Trade Chapter 8 Demand and Supply Functions and Elasticity Measures Notes on CTools Chapter 6 Also Chapter 4 regarding taxation and elasticity Externalities, public goods and common property resources Chapter 5 Office Hours/Review Review Sessions Friday 4pm6pm AH Auditorium D Saturday 4pm6pm AH Auditorium D GSI office hours Usual scheduled office hours Friday 12:001:00 and 3:004:00, MH 3330 My office hours Tues, Thurs 3:00 4:30, Lorch M109 Friday 3:30 5:00, Lorch M109 Monday 2:00 4:00, Lorch M109 Alternatives to private solutions: The pollution example Regulation of pollution by command Legislate technology to be used Legislate caps on output of products No way to ensure that the "cheap" method of abatement is used Alternatives to private solutions: The pollution example Taxation of polluting firms We want to "internalize" the external costs of pollution Impose a tax equal to the marginal external cost from pollution Parties to the transaction observe both production costs AND taxation costs Important: MEC calculated at the efficient level of output Polluter's MC = MCprivate. + tax = MCprivate + MEC = MCsoc Pigouvian Tax
$/unit MCsoc MCprivate MD
MCsoc = MV c P P* Pp t* DWL MV Qeff tax Q* Q Pigouvian Tax
$/unit MCsoc MECH
MCsoc = MV c P P* Pp t* MCprivate DWL Marginal externality at the social optimum MECL
MV Qeff Q* Q Pigouvian Subsidy
$/unit DWL MEBL MC Pp MC = MVsoc P* s* MVsoc Pc Q* Marginal externality at the MEBH social optimum
MVprivate Qeff Q Pigouvian Taxation vs. Coasian Solutions Pigouvian taxation: Need to know information about private costs and benefits Tax is appropriately placed upon the amount of the externality produced (e.g. on amount of pollution) Coasian Solutions: Might be difficult to measure the externality Instead tax the activity that produces the externality May not encourage efficient avoidance of the externality No need to know information about private costs and benefits Potentially provides incentives on all relevant margins Requires well defined and enforceable property rights Requires bargaining and transactions costs are low Joint Consumption Temptation to think externalities are always "sideeffects" Some goods and services provide externalities because they are jointly consumed Examples: Social benefit is the sum of all consumers' private benefits If I pay to erect a lighthouse to keep my ship safe, other ships benefit from the light as well If I pay to erect a wall to keep Canadians out of Michigan, everybody else benefits the same way BUCKETHEAD Example: Radio Broadcast WBUK "All Buckethead, All The Time"
$/hour MVsoc Marginal externality P DWL
Supply MV2 Marginal externality MV1 Q* Qeff Hours broadcast/day Another Example Pollution as a "public bad" Retirement of pollution permits is a public good
Free riding Low incentive for any individual to contribute Contributions are low, and don't reflect the social value of the retired permits What's the Problem Here? Poorly assigned/enforced property rights Call such a good a Public Good Examples: Jointly consumable good (no "rivalry" in consumption Difficult to exclude consumers ("non excludable") National Defense Radio Broadcasts Environmental Quality Ozone Layer Legal System Implications of Non-Excludability Implies that property rights are poorly defined Generates market failures If I cannot be prevented from consuming a good, nobody can make me pay for it If I don't have to pay for it, I can't credibly express my valuation for that good Better to think of exclusion being costly The more costly exclusion, the closer we get to the non excludability idea
"Free Riding" Nonexcludability is rarely truly attained Solution to the Public Goods Provision Problem
$/hour MVsoc P1+P2 = MC P2 P1 Qeff Supply (MC) MV2 MV1 Hours broadcast/day Solution to the Public Goods Provision Problem Theoretically, solution is similar to that in the standard externality problem: Provide missing market(s) The missing markets are individual specific markets for the enjoyment of the public good Assigning and enforce property rights Allow trade in the rights to enjoy the externality To assign property rights, we must have excludability E.g. Compare internet radio broadcasts (excludable at low cost) to traditional radio broadcasts (excludable only at high cost) Excludability allows individuals to be charged different prices in order to consume the good i.e. solve the missing market problem Taxation Solutions If we cannot exclude people, then we can make all people pay But how much should each person pay? Taxation Taxation schemes generally cannot differentiate between people to ensure individual's price equals individual's marginal valuation Even if we can charge different people different prices, how do we know their valuations? Inefficient provision of public goods: better or worse than the market? Taxonomy of Goods
Rivalry in Consumption Private Good food haircuts highways Common Property Resource common pasture land QuasiPublic Good Club Good websites swimming pool Public Good radio broadcast national defense Difficulty to Exclude Consumers Common Property Resources Usually associated with a negative externality Exclusion is costly, so many people can use the resource There is rivalry, so additional users impose negative externalities of existing users Additional users ignore those externalities Resource is overused or congested "The Tragedy of the Commons" Solution? Problem lies in assignment of property rights and excludability If you can potentially exclude users, then you can make them pay to use the resource Charge a price equal to the externality imposed But if exclusion costs are very high, this solution is not available Example: Road Pricing Imposing different tolls on different roads gives drivers incentive to change their routes High tolls imposed where congestion costs are high Zero tolls charged where congestion costs are negligible Requires technology that excludes those who don't pay (or punishes those who use without paying) E.g Singapore's road pricing experience Tolls vary by location Tolls vary by time Tolls are easily amended in response to changing traffic patterns Network Externalities Converse of the common property case Additional users provide positive externalities to existing users Potential market failure: under involvement in a given network, and too many networks available ...
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