AEM 250 Lec 12 Pigou v Coase 9-20-10 sv

AEM 250 Lec 12 Pigou v Coase 9-20-10 sv - The Solution to...

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The Solution to Pollution? versus igou Pigou Coase 1. Marginal Net Benefits. 2. The Coase Theorem a. Popular interpretation b. What Coase really meant
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Marginal Cost = Marginal Benefit ( MC = MB =0.75, Q=75)) No Externality 2.25 2.50 ( Mankiw #3: Rational people think at the margin) 50 1.75 2.00 per kL Marginal Cost Marginal Benefit 1.00 1.25 1.50 ce $AU p NES = A + B+ C + D E+F+G+J+K 0.50 0.75 Pri c + E + F + G + J + K 0.00 0.25 02 5 5 0 7 5 1 0 0 1 2 5 Million kL per Quarter (AKA Supply = Demand )
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STILL ANOTHER WAY OF LOOKING AT THINGS Marginal Net Benefit = Marginal Benefit Marginal Cost 2.50 No Externality ( Mankiw #3: Rational people think at the margin) 75 2.00 2.25 r kL Marginal Net 1.25 1.50 1.75 $AU pe r Benefit 0.50 0.75 1.00 Price $ NES = A + B+ C + D E+F+G+J+K 0.00 0.25 0 25 50 100 125 + E + F + G + J + K Million kL per Quarter (See Gobbet 9, and Harris 91-93)
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Diagramming the NES for a Negative Externality 00 2.25 2.50 arginal (Private) Cost 1.50 1.75 2.00 per k L Marginal (Private) Cost Marginal Benefit Marginal Social Cost 1.00 1.25 ce $AU A I 25 0.50 0.75 Pri c B C D E F L J K G 0.00 0.25 02 5 5 0 7 5 1 0 0 1 2 5 H Million kL per Quarter
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We Can Introduce the Externality (Marginal External Social Costs) 2.25 2.50 1.75 2.00 er kL Marginal Net Benefit 00 1.25 1.50 $AU p e Marginal External Social Costs 0.50 0.75 1.00 Price A + B + C + D 0.00 0.25 E + F + G J +K I 0 25 50 75 100 125 Million kL per Quarter
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One Solution: Regulations (a.k.a. Command-and –Control) .25 2.50 Limit output to 67.5 units 1.75 2.00 2.25 er kL Marginal Net Benefit What Happens to Dead Weight Loss? Why? 00 1.25 1.50 $AU p e Marginal Externaal Social Costs MNB 0.50 0.75 1.00 Price $ MESC Social Optimum 0.00 0.25 rivate Market 0 25 50 75 100 125 Million kL per Quarter Private Market Equilibrium
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Alternative Depiction - Pigouvian Solution: Set a Per-Unit Tax (t=0.225 $/kL) Equal to the MESC at .25 2.50 the Social Optimum 1.75 2.00 2.25 er kL Marginal Net Benefit What Happens to Dead Weight Loss? Why? 1.25 1.50 $AU p e Marginal Externaal Social Costs MNB 0.50 0.75 1.00 Price $ ESC DWL Social Optimum 0.00 0.25 TAX MESC rivate Market I+I’ 0 25 50 75 100 125 Million kL per Quarter Private Market Equilibrium
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• The traditional approach has been to obscure the nature of the choice that has to “Coase heorem” be made. The question is commonly thought of one in which A inflicts harm on B, and what has to be decided is how do we Theorem (1960) restrain A (through regulation or taxes)? But this is wrong. We are dealing with a problem of a reciprocal nature. To avoid Marginal Net Benefits the harm to B would inflict harm on A. The real question to be decided is: should A be allowed to harm B or should B be allowed to harm A?
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This note was uploaded on 12/20/2010 for the course AEM 25 at Cornell University (Engineering School).

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AEM 250 Lec 12 Pigou v Coase 9-20-10 sv - The Solution to...

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