Quản trị kinh doanh - Chapter 17: Externalities and public goods

Externalities and Public GoodsChapter 17Copyright (c)2014 John Wiley & Sons, Inc.1Chapter Seventeen OverviewMotivationInefficiency of Competition with ExternalitiesAllocation Property Rights to Restore Optimality The Coase TheoremProblems with the Coase ApproachOther Methods to Restore Optimality – Standards and FeesPublic GoodsA TaxonomyDemand for Public GoodsFree Riders and the Supply of Public GoodsChapter SeventeenCopyright (c)2014 John Wiley & Sons, Inc.2Chapter SeventeenExternalitiesDefinition: If one agent's actions imposes costs on another party, the agent exerts a negative externality, while if the agent's actions have benefits for another party, the agent exerts a positive externality. Network externalities, snob effects Wind chimesWhen externalities are present, the competitive market may not attain the Pareto Efficient outcome. Copyright (c)2014 John Wiley & Sons, Inc.3Chapter SeventeenInefficiency of Competition with ExternalitiesCopyright (c)2014 John Wiley & Sons, Inc.4Chapter SeventeenInefficiency of Competition with Externalities Private Social Change Optimum Consumers Surplus A+B+G +K A - B - C - K Private Producers Surplus E+ F+ R+H+N B+E+F+R+H+G B + G - N Externality Cost -R-H-N-G-K-M -R-H-G M+N+K Net Social Benefits A+B+E+F-M A+B+E+F M(consumer surplus + private producersurplus - cost of externality) Deadweight Loss M zero M Copyright (c)2014 John Wiley & Sons, Inc.5Chapter SeventeenInefficiency of Competition with ExternalitiesCopyright (c)2014 John Wiley & Sons, Inc.6Chapter SeventeenInefficiency of Competition with Externalities Private Social Change Optimum Private Consumers Surplus B+E +F B+E+F+G+K+L G+K+L Producers Surplus G+R F+G+R+J+M F+J+M Externality Benefit A+H+J A+H+J+M+N+T M+N+T Government Cost from Subsidy zero -F-G-J-K-L-M-T -F-G-J-K-L-M-T Net Social Benefits A+B+E+F A+B+E+F+G+H M+N (consumer surplus + private producer +G+H+J+R +J+M+N+Rsurplus - cost of externality) Copyright (c)2014 John Wiley & Sons, Inc.7Chapter SeventeenCompetitive Market & Social Optimum Competitive market: p = MPC Social optimum: p = MSCCompetitive market creates a dead-weight loss (socially excessive negative externalities)This is because the polluter does not have to pay for pollution Socially optimal amount of waste is non-zero.How can we restore optimality?Copyright (c)2014 John Wiley & Sons, Inc.8Chapter SeventeenCompetitive Market & Social OptimumEmissions Standards – A governmental limit on the amount of pollution that may be emitted.Emissions Fee – A tax imposed on pollution that is released into the environment.Copyright (c)2014 John Wiley & Sons, Inc.9Pp ($/ton)Qp (tons/day)W (units/day)0MCPMCS = MCP + MCWMCWDemand for PaperChapter SeventeenMethods to Restore OptimalityEmissions Standards (quota)Copyright (c)2014 John Wiley & Sons, Inc.10?0Demand for paperMCWMCP•••eSMCGMCPQS= QuotaTChapter SeventeenPp ($/ton)MCS = MCP + MCWOther Methods to Restore OptimalityWhat is the marginal cost of pollution at the social optimum?Emissions Standards (quota)Qp (tons/day)W (units/day)Copyright (c)2014 John Wiley & Sons, Inc.11Chapter SeventeenRestoring OptimalityThrough Property Rights AllocationDefinition: A property right is a legal rule that describes what economic agents can do with an object or idea.Deed to parcel of land; patent on a methodCommon Property – A resource, such as a public park or a highway that anyone can access.Copyright (c)2014 John Wiley & Sons, Inc.12Chapter SeventeenSuppose that paper mill may reduce its emissions of gunk by installing filters and fishermen can reduce emissions by installing a water treatment plant.Restoring Optimality – Paper Mill & FishermenThrough Property Rights AllocationPayoff AssumptionsCopyright (c)2014 John Wiley & Sons, Inc.13Chapter SeventeenRestoring Optimality – Paper Mill & FishermenThrough Property Rights AllocationCase 1: No explicit rights allocation Nash outcome: no filter, treatment plant Joint payoff = 700 (not Pareto efficient)Copyright (c)2014 John Wiley & Sons, Inc.14Chapter SeventeenCase 2: Fishermen have property right to no Pollution (and so, set a fee of, say, $500 for receiving pollution)Restoring Optimality – Paper Mill & FishermenThrough Property Rights AllocationNash Outcome: Filter, No treatmentJoint Payoff = 800 (Pareto Efficient)Copyright (c)2014 John Wiley & Sons, Inc.15Chapter SeventeenRestoring Optimality – Paper Mill & FishermenThrough Property Rights AllocationCase 3: Mill has right to pollute. Suppose the mill "sells" right to fresh water (i.e. obligation to install filter) for $250:Nash Outcome: Filter, No Treatment Joint Payoff = 800 (Pareto Efficient)Copyright (c)2014 John Wiley & Sons, Inc.16Chapter SeventeenThe Coase Theorem If there are no impediments to bargaining, assigning property rights results in the efficient outcome (at which joint profits are maximized). Efficiency is achieved regardless of who receives the property rights. Who gets the property rights affects the income distribution: the property rights are valuable. (The party with the property rights is compensated by the other party.)Copyright (c)2014 John Wiley & Sons, Inc.17Chapter SeventeenThe Coase TheoremChallenges Transaction Costs may be high; Large numbers of injured parties; Incomplete/Asymmetric Information.e.g. What are the long run effects of genetic engineering?Copyright (c)2014 John Wiley & Sons, Inc.18Chapter SeventeenPublic GoodsDefinition: Rivalry in consumption means that only one person can consume a good: the good is used up in consumption (it can be depleted).Definition: Exclusion in consumption means that others can be prevented from consuming a good.Copyright (c)2014 John Wiley & Sons, Inc.19Chapter SeventeenDefinition: Private goods have properties of rivalry and exclusion. Pure Public goods lack both rivalry and exclusion. Club goods lack rivalry but have property of exclusion. Common property lacks exclusion but does have the property of rivalry.Public GoodsExamplesCopyright (c)2014 John Wiley & Sons, Inc.20Chapter SeventeenDemand for Public GoodsBecause public goods lack rivalry, the aggregate demand is the aggregate willingness to pay curve: the vertical sum of the individual demand curves.Copyright (c)2014 John Wiley & Sons, Inc.210Price ($/unit)Quantity of Public GoodD140030020010010030Chapter SeventeenEfficient Provision of a Public GoodCopyright (c)2014 John Wiley & Sons, Inc.22D2Chapter SeventeenPrice ($/unit)Quantity of Public Good400300200100Efficient Provision of a Public Good0D110030200Copyright (c)2014 John Wiley & Sons, Inc.23MC = 240MC = 50Chapter SeventeenD2Price ($/unit)Quantity of Public Good400300200100Efficient Provision of a Public Good0D130200100Copyright (c)2014 John Wiley & Sons, Inc.24MSBChapter SeventeenMC = 240MC = 50D2Price ($/unit)Quantity of Public Good4003002001000D130200100Efficient Provision of a Public GoodCopyright (c)2014 John Wiley & Sons, Inc.25MC = 400Chapter SeventeenMSBMC = 240MC = 50D2Price ($/unit)Quantity of Public Good4003002001000D130200100Efficient Provision of a Public GoodCopyright (c)2014 John Wiley & Sons, Inc.26Chapter SeventeenExampleConsumer 1: P1 = 100 - QConsumer 2: P2 = 200 - QHow would we determine the efficient level of the public god algebraically assuming the marginal cost of the public good is $240?Summing P1 and P2, we obtain MSB = P1 + P2 = 100 - Q + 200 - Q = 300 - 2QEfficient Provision of a Public GoodCopyright (c)2014 John Wiley & Sons, Inc.27Chapter SeventeenEfficient Provision of a Public GoodSetting MSB = MC, we have:300 - 2Q = 240OrQ* = 30Copyright (c)2014 John Wiley & Sons, Inc.28Chapter SeventeenFree RiderDefinition: a free rider benefits from an action of other (s) without paying for that action.Solutions to the free rider problemSocial Pressure Government ActionTransformation to Private GoodCopyright (c)2014 John Wiley & Sons, Inc.29Chapter SeventeenSummary1. When one agent's actions affect another agent, the agent exerts an externality.2. When externalities are present the competitive market may not attain the Pareto Efficient outcome.3. We can restore optimality by assigning property rights to the cause of the externality (The Coase Theorem).4. If we follow this approach, efficiency is achieved regardless of who receives the property rights; however, the property rights affect the income distribution.Copyright (c)2014 John Wiley & Sons, Inc.30Chapter SeventeenSummary5. When transaction costs are high or there is asymmetric or incomplete information, allocating property rights may not restore optimality. 6. Other methods of restoring optimality include standards and fees.7. Private goods have the properties of rivalry and exclusion. Other types of goods exist that do not have these properties.Copyright (c)2014 John Wiley & Sons, Inc.31Chapter SeventeenSummary8. Goods that lack rivalry and exclusion are called pure public goods.9. The demand for pure public goods is the vertical sum of the individual willingness to pay for the good. 10. Pure public goods tend to be undersupplied by the market.Copyright (c)2014 John Wiley & Sons, Inc.32