Firms with high cost of reducing pollution buy

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Firms with high cost of reducing pollution buy permits Result: Pollution reduction is concentrated among those firms with lowest costs
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GESB 1006: Economics of Everyday Life University of Macau Public Policies Toward Externalities Reducing pollution using pollution permits or corrective taxes Firms pay for their pollution Corrective taxes: pay to the government Pollution permits: pay to buy permits Internalize the externality of pollution
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GESB 1006: Economics of Everyday Life University of Macau Public Policies Toward Externalities Objections to the economic analysis of pollution ●“ We cannot give anyone the option of polluting for a fee .” - by late Senator Edmund Muskie People face trade-offs Eliminating all pollution is impossible Clean water and clean air opportunity cost: lower standard of living
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GESB 1006: Economics of Everyday Life University of Macau Public Policies Toward Externalities Clean environment is a normal good Positive income elasticity Rich countries can afford a cleaner environment More rigorous environmental protection Clean air and clean water - law of demand The lower the price of environmental protection The more the public will want it
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GESB 1006: Economics of Everyday Life University of Macau Private Solutions to Externalities The types of private solutions Moral codes and social sanctions Charities and so forth
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GESB 1006: Economics of Everyday Life University of Macau Private Solutions to Externalities The Coase theorem If private parties can bargain without cost over the allocation of resources They can solve the problem of externalities on their own Whatever the initial distribution of rights, interested parties can reach a bargain: Everyone is better off Outcome is efficient
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GESB 1006: Economics of Everyday Life University of Macau Private Solutions to Externalities: An Example Neighbor with A Barking Dog 1. Fiona has the legal right to keep a barking dog (Nineja). Fiona gets a $500 benefit from the dog Sam bears an $800 cost from the barking Efficient outcome: Sam can offer Fiona $600 to get rid of the dog Fiona will gladly accept Bye-bye Nineja! Both are better off.
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GESB 1006: Economics of Everyday Life University of Macau Private Solutions to Externalities: An Example Neighbor with A Barking Dog 2. Fiona has the legal right to keep a barking dog (Nineja). Fiona gets a $2000 benefit from the dog Sam bears an $800 cost from the barking Efficient outcome: Fiona turns down any offer below $2000 Sam will not offer any amount above $800 Fiona keeps the dog
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GESB 1006: Economics of Everyday Life University of Macau Private Solutions to Externalities: An Example Neighbor with A Barking Dog 3. Sam can legally compel Fiona to get rid of the dog (Nineja). Fiona gets a $800 benefit from the dog Sam bears an $500 cost from the barking Efficient outcome: Fiona keeps the dog by paying Sam $600 so that Sam would put up with Nineja’s barking *Note that the private market achieves the efficient outcome regardless of the initial distribution of rights.
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GESB 1006: Economics of Everyday Life University of Macau Private Solutions to Externalities: An Example Neighbor with A Barking Dog 4. Sam can legally compel Fiona to get rid of the dog (Nineja).
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  • Fall '18
  • Market failure, Externality, University of Macau, Economics of Everyday Life

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