5 gain a lot individual voters lose only a little and

This preview shows page 5 - 7 out of 16 pages.

5 gain a lot, individual voters lose only a little and are unlikely to realize they are being disadvantaged. One example of the benefits that a special interest group can obtain at the expense of the general public is the US sugar program. The price of sugar in the US is approximately twice as high as the world price because very little is allowed to be imported. Keeping the price high results in a gain to sugar farmers of about $1 billion annually, at a cost to consumers of about $3 billion, which is obviously highly inefficient. Although the total costs of the sugar program are very large, they are easily overlooked by the general public, for whom the average annual cost per person is only about $9. While it is necessary to keep in mind that government failures may result in governmental actions that affect market outcomes not being efficient, we will focus mainly on market failures caused by pollution. Derivation of the standard pollution diagram The producers of pollution will be referred to as polluters and those adversely affected by pollution will be referred to as victims of pollution. While it is common to think of firms as polluters and consumers as victims, pollution may be produced by consumers and governments as well as firms, and victims may include firms and governments as well as consumers. Also, the polluters and victims may in fact be the same individuals, as when automobile drivers are harmed by the pollution created by themselves and other drivers. We will make the standard assumption that polluters and victims make their decisions based solely on their own benefits and costs. Because negative technological externalities are not reflected in market prices, they will not affect private decisions concerning production or consumption, and this will result in too much pollution. For a simple example, consider an individual consumer who enjoys smoking cigars. The height of the individual’s demand curve for cigars is equal to their marginal willingness to pay, MWTP, for each unit. The cigar smoker will consume the quantity of cigars that maximizes their utility. As shown in Figure 1.2, this will result in the amount of smoking being equal to Q 0 , the quantity for which the marginal willingness to pay is equal to the price, P. Assuming that the cigar industry is perfectly competitive, the price will be equal to marginal cost, MC. Therefore, MWTP = P and P = MC, implying that MWTP = MC. If there was no externality, this would result in Q 0 being the efficient amount to be produced and consumed. " special Interest groups " O O polpfytm.rs Victims this role could u consumers : always change - - = =
Image of page 5

Subscribe to view the full document.

6 Figure 1.2 Cigar Demand and Supply $ Cigars smoked P = MC Q 0 MWTP However, cigar smoking produces second-hand smoke, which is assumed to affect other individuals’ utility functions negatively and therefore is a form of pollution.
Image of page 6
Image of page 7
  • Fall '08
  • Staff
  • Pollution, Externality, Ronald Coase

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern