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Econ 131 lecture 4 example

Econ 131 lecture 4 example - and services provided by the...

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Example from Lecture 4 Supply and demand for meat. An externality (direct, uncompensated, and unintentional) exists since the process of supplying meat creates damages that include nitrate pollution, greenhouse gases, and the destruction of habitat. P M and Q M are the price and quantity that appear in a market economy when the market for damages (i.e. some system of compensation for damages) is missing. We will argue that prices and quantities P* and Q* provide greater total surplus than the market outcome. Notes/responses for the questions from Lecture 4: Meat eaters: demand curve Farmers: PMC curve Nitrate pollution and habitat destruction: Marginal damage curve Farmer surplus in market outcome: E+F+G Meat eaters surplus in market outcome: A+B+C+D MD can be measured using WTP studies, revealed preference, and the value of goods
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Unformatted text preview: and services provided by the ecosystems that meat production damages • Total environmental damage at the market equilibrium: J+K = (F+C)+(G+D+L) • The best society can do is to move to the quantity Q* (where we assume price has risen to P* to avoid rationing). This results in: o Farmer surplus: B+C+E+F o Meat eater surplus: A o Damage: J o Total surplus: A+B+C+E+F-J • Total surplus at the status quo market equilibrium: A+B+C+D+E+F+G-J-K • What society gets by moving to Q*: +K-D-G = L o L is the loss produced by the market when there is an externality. Equivalently, L is the gain that is possible if we can correct the market failure. Demand P M P* K H B A I J L C D E G Societal MC (PMC+MD) Supply= Private MC Marginal Damage Price Quantity of meat Q* Q M F...
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