Private outcome efficient outcome The private market achieves the efficient

Private outcome efficient outcome the private market

This preview shows page 23 - 30 out of 43 pages.

Private outcome = efficient outcome.The private market achieves the efficient outcome The private market achieves the efficient outcome regardless of the initial distribution of rights.regardless of the initial distribution of rights.The private market achieves the efficient outcome The private market achieves the efficient outcome regardless of the initial distribution of rights.regardless of the initial distribution of rights.
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AA  CC  TT  II  VV  E  LE  L  EE  AA  RR  NN  II  NN  G  G  22:   :   BrainstormingBrainstormingCollectively, the 1000 residents of Green Valley value swimming in Blue Lake at $100,000. A nearby factory pollutes the lake water, and would have to pay $50,000 for non-polluting equipment. A.Describe a Coase-like private solution. B.Can you think of any reasons why this solution might not work in the real world? 24
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CHAPTER 10 EXTERNALITIES25Why Private Solutions Do Not Always WorkTransaction costs: the costs that parties incur in the process of agreeing to and following through on a bargainSometimes when a beneficial agreement is possible, each party may hold out for a better deal.Coordination problems & costs when the number of parties is very large.
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CHAPTER 10 EXTERNALITIES26Public Policies Toward ExternalitiesTwo approachesCommand-and-control policiesregulate behavior directly. Examples:limits on quantity of pollution emittedrequirements that firms adopt a particular technology to reduce emissionsMarket-based policiesprovide incentives so that private decision-makers will choose to solve the problem on their own.
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CHAPTER 10 EXTERNALITIES27Market-Based Policy #1:  Corrective Taxes & SubsidiesCorrective tax: a tax designed to induce private decision-makers to take account of the social costs that arise from a negative externalityAlso called Pigouvian taxesafter Arthur Pigou (1877-1959). The ideal corrective tax = external costFor activities with positive externalities, ideal corrective subsidy = external benefit
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CHAPTER 10 EXTERNALITIES28Market-Based Policy #1:  Corrective Taxes & SubsidiesExample: Acme, US Electric run coal-burning power plants. Each emits 40 tons of sulfur dioxide per month. SO2causes acid rain & other health issues.Policy goal: reducing SO2emissions 25%Policy optionsregulation: require each plant to cut emissions by 25%corrective tax: Make each plant pay a tax on each ton of SO2emissions. Set tax at level that achieves goal.
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CHAPTER 10 EXTERNALITIES29Market-Based Policy #1:  Corrective Taxes & SubsidiesSuppose cost of reducing emissions islower for Acme than for US Electric. Socially efficient outcome: Acme reduces emissions more than US Electric.
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  • Spring '11
  • Dr.Edmondson
  • Externalities, Market failure, DICK, Externality

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