CHAPTER 18 - PHALL-82241 PINDYCK CHAPTER 18 page 6 of 20...

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Unformatted text preview: PHALL-82241 PINDYCK CHAPTER 18 page 6 of 20 FIGURE 18.1 External Cost Price MSC Price MC MSC I S � MC I P* P1 P1 MEC I MEC D q* q 1 Firm output (a) Q* Q1 Industry output (b) When there are negative externalities, the marginal social cost MSC is higher than the marginal cost MC. The difference is the marginal external cost MEC. In (a), a profit-maximizing firm produces at q1, where price is equal to MC. The efficient output is q*, at which price equals MSC. In (b), the industry’s competitive output is Q1, at the intersection of industry supply MCI and demand D. However, the efficient output Q* is lower, at the intersection of demand and marginal social cost MSCI. Fig 18-01.EPS PHALL-82241 PINDYCK CHAPTER 18 page 7 of 20 FIGURE 18.2 External Benefits Value MSB D P1 MC P* MEB q1 q* Repair level When there are positive externalities, marginal social benefits MSB are higher than marginal benefits D. The difference is the marginal external benefit MEB. A selfinterested homeowner invests q1 in repairs, determined by the intersection of the marginal benefit curve D and the marginal cost curve MC. The efficient level of repair q* is higher and is given by the intersection of the marginal social benefit and marginal cost curves. Fig 18-02.EPS PHALL-82241 PINDYCK CHAPTER 18 page 8 of 20 FIGURE 18.3 Sulfur Dioxide Emissions Reductions Dollars 60 per unit of reduction 40 Marginal External Cost 20 Marginal Abatement Cost 0 0.02 0.04 0.06 0.08 Sulfur dioxide concentration (ppm) The efficient sulfur dioxide concentration equates the marginal abatement cost to the marginal external cost. Here the marginal abatement cost curve is a series of steps, each representing the use of a different abatement technology. Fig 18-03.EPS PHALL-82241 PINDYCK CHAPTER 18 page 9 of 20 FIGURE 18.4 The Efficient Level of Emissions Dollars per unit of emissions MEC 6 4 2 MCA 0 2 4 6 E0 8 10 12 E* 14 16 18 20 22 26 E1 Level of emissions The efficient level of factory emissions is the level that equates the marginal external cost of emissions MEC to the benefit associated with lower abatement costs MCA. The efficient level of 12 units is E*. Fig 18-04.EPS 24 PHALL-82241 PINDYCK CHAPTER 18 page 10 of 20 FIGURE 18.5 Standards and Fees Dollars per unit of emissions MEC Standard Fee 3 MCA 12 26 E* Level of emissions The efficient level of emissions at E* can be achieved through either an emissions fee or an emissions standard. Facing a fee of $3 per unit of emissions, a firm reduces emissions to the point at which the fee is equal to the marginal cost of abatement. The same level of emissions reduction can be achieved with a standard that limits emissions to 12 units. Fig 18-05.EPS PHALL-82241 PINDYCK CHAPTER 18 page 11 of 20 FIGURE 18.6 The Case for Fees Dollars per unit of emissions MCA 1 MCA 2 6 5 4 3.75 3 2.50 2 Firm 1’s Increased Abatement Costs Firm 2’s Reduced Abatement Costs 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Level of emissions With limited information, a policymaker may be faced with the choice of either a single emissions fee or a single emissions standard for all firms. The fee of $3 achieves a total emissions level of 14 units more cheaply than a 7-unit-per-firm emissions standard. With the fee, the firm with a lower abatement cost curve (Firm 2) reduces emissions more than the firm with a higher cost curve (Firm 1). Fig 18-06.EPS PHALL-82241 PINDYCK CHAPTER 18 FIGURE 18.7 The Case for Standards Dollars per unit 16 of emissions C Marginal External Cost 14 12 E 10 A 8 D B 6 Marginal Cost of Abatement 4 2 2 4 6 8 10 12 14 16 Level of emissions When the government has limited information about the costs and benefits of pollution abatement, either a standard or a fee may be preferable. The standard is preferable when the marginal external cost curve is steep and the marginal abatement cost curve is relatively flat. Here a 12.5 percent error in setting the standard leads to extra social costs of triangle ADE. The same percentage error in setting a fee would result in excess costs of ABC. Fig 18-07.EPS page 12 of 20 PHALL-82241 PINDYCK CHAPTER 18 page 13 of 20 FIGURE 18.8 Price of Tradeable Emissions Permits 1800 1600 Price (dollars/ton) 1400 1200 1000 800 600 400 200 0 1993 1995 1997 1999 2001 2003 2005 Year The price of tradeable permits for sulfur dioxide emissions fluctuated between $100 and $200 in the period 1993 to 2003, but then increased sharply during 2005 and 2006 in response to an increased demand for permits. Since then, the price has fluctuated around $400 to $500 per ton. Fig 18-08.EPS 2007 PHALL-82241 PINDYCK CHAPTER 18 page 14 of 20 FIGURE 18.9 The Efficient Amount of Recycling Cost (dollars) MSC MCR MC + per-unit refund MC 4 m* m1 8 12 The efficient amount of recycling of scrap material is the amount that equates the marginal social cost of scrap disposal, MSC, to the marginal cost of recycling, MCR. The efficient amount of scrap for disposal m* is less than the amount that will arise in a private market, m1. Fig 18-09.EPS Scrap PHALL-82241 PINDYCK CHAPTER 18 FIGURE 18.10 Refundable Deposits Sr $ Sr′ Sv S S′ P P′ D M1 M* Amount of glass Initially, equilibrium in the market for glass containers involves a price P and a supply of recycled glass M1. By raising the relative cost of disposal and encouraging recycling, the refundable deposit increases the supply of recycled glass from Sr to S?r and the aggregate supply of glass from S to S?. The price of glass then falls to P?, the quantity of recycled glass increases to M*, and the amount of disposed glass decreases. Fig 18-10.EPS page 15 of 20 PHALL-82241 PINDYCK CHAPTER 18 page 16 of 20 FIGURE 18.11 Common Property Resources Benefits, Costs (dollars per fish) Marginal Social Cost Private Cost Demand F* Fc Fish per month When a common property resource, such as a fishery, is accessible to all, the resource is used up to the point Fc at which the private cost is equal to the additional revenue generated. This usage exceeds the efficient level F* at which the marginal social cost of using the resource is equal to the marginal benefit (as given by the demand curve). Fig 18-11.EPS PHALL-82241 PINDYCK CHAPTER 18 page 17 of 20 FIGURE 18.12 Crawfish as a Common Property Resource C Cost (dollars per pound) Marginal Social Cost 2.10 Private Cost 0.325 Demand 9.2 11.9 F Crawfish catch (millions of pounds) Because crawfish are bred in ponds to which fishermen have unlimited access, they are a common property resource. The efficient level of fishing occurs when the marginal benefit is equal to the marginal social cost. However, the actual level of fishing occurs at the point at which the price for crawfish is equal to the private cost of fishing. The shaded area represents the social cost of the common property resource. Fig 18-12.EPS PHALL-82241 PINDYCK CHAPTER 18 page 18 of 20 FIGURE 18.13 Efficient Public Good Provision Benefits (dollars) 7.00 5.50 4.00 Marginal Cost D2 D 1.50 0 D1 1 2 3 4 5 6 7 8 9 10 Output When a good is nonrival, the social marginal benefit of consumption, given by the demand curve D, is determined by vertically summing the individual demand curves for the good, D1 and D2. At the efficient level of output, the demand and the marginal cost curves intersect. Fig 18-13.EPS PHALL-82241 PINDYCK CHAPTER 18 page 19 of 20 FIGURE 18.14 The Demand for Clean Air Willingness to Pay 3000 High Income Middle Income 2500 2000 Low Income 1500 1000 500 0 1 2 3 4 5 6 7 8 9 10 Nitrogen oxide (pphm) The three curves describe the willingness to pay for clean air (a reduction in the level of nitrogen oxides) for each of three different households (low income, middle income, and high income). In general, higher-income households have greater demands for clean air than lower-income households. Moreover, each household is less willing to pay for clean air as the level of air quality increases. Fig 18-14.EPS PHALL-82241 PINDYCK CHAPTER 18 page 20 of 20 FIGURE 18.15 Determining the Level of Educational Spending Willingness to pay AW W2 W1 0 600 1200 W3 1800 2400 Education spending per pupil (in dollars) The efficient level of educational spending is determined by summing the willingness to pay for education (net of tax payments) of each of three citizens. Curves W1, W2, and W3 represent their willingness to pay, and curve AW represents the aggregate willingness to pay. The efficient level of spending is $1200 per pupil. The level of spending actually provided is the level demanded by the median voter. In this particular case, the median voter's preference (given by the peak of the W2 curve) is also the efficient level. Fig 18-15.EPS ...
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This note was uploaded on 09/28/2011 for the course ECON 105 taught by Professor Prof.eco during the Spring '11 term at Indian School of Business.

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