# 28 - The Solution to Pollution versus Pigou 1 Marginal Net...

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The Solution to Pollution? Pigou versus Coase 1. Marginal Net Benefits. 2. The Coase Theorem a. Popular version b. What Coase Meant

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0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 0 25 50 75 100 125 Million kL per Quarter Price \$AU per kL Marginal Cost Marginal Benefit Marginal Cost = Marginal Benefit ( MC = MB =0.75, Q=75)) No Externality ( Mankiw #3: Rational people think at the margin) (AKA Supply = Demand ) NES = A + B+ C + D + E + F + G + J + K
0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 0 25 50 75 100 125 Million kL per Quarter Price \$AU per kL Marginal Net Benefit STILL ANOTHER WAY OF LOOKING AT THINGS STILL ANOTHER WAY OF LOOKING AT THINGS Marginal Net Benefit = Marginal Benefit Marginal Cost No Externality ( Mankiw #3: Rational people think at the margin) NES = A + B+ C + D + E + F + G + J + K (See Gobbet 9, and Harris 91-93)

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0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 02 5 5 0 7 5 1 0 0 1 2 5 Million kL per Quarter Price \$AU per kL Marginal (Private) Cost Marginal Benefit Marginal Social Cost A B C D E F L H I J K G Diagramming the NES for a Negative Externality
We Can Introduce the Externality (Marginal External Social Costs) 0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 0 25 50 75 100 125 Million kL per Quarter Price \$AU per kL Marginal Net Benefit Marginal External Social Costs A + B + C + D E + F + G J +K I

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0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 0 25 50 75 100 125 Million kL per Quarter Price \$AU per kL Marginal Net Benefit Marginal Externaal Social Costs One Solution: Regulations (a.k.a. Command-and –Control) Limit output to 67.5 units MESC MNB What Happens to Dead Weight Loss? Why? Private Market Equilibrium Social Optimum
Pigouvian Taxes: “Polluter Pays” Principle A. C. Pigou, 1877-1959. As the prize student and designated heir of Alfred Marshall , Arthur Cecil Pigou personified the "Cambridge Neoclassicals" - the heart of the Marshallian orthodoxy in the first third of the century. His main claim to fame is his Wealth and Welfare (1912, 1920), which brought social welfare into the scope of economic analysis. In particular, Pigou is responsible for the famous distinction between private and social marginal products and costs and the idea that governments can, via a mixture of taxes and subsidies, correct such market failures - or "internalize the externalities". Pigouvian Tax : set the per unit tax on the polluting source equal to the marginal external social costs of the pollutant at the social optimum.

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28 - The Solution to Pollution versus Pigou 1 Marginal Net...

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