Principles of Microeconomics Module 7.1. Externalities

Transcription

1 Principles of Microeconomics Module 7.1 Externalities 256

2 Externalities The uncompensated impact of one person s actions on the wellbeing of a bystander is an externality Positive Externality: Beneficial for the bystander Negative Externality: Adversely effects bystander 257

3 Recap on Supply and Demand Recall that supply reflects the cost to provide the good/service for the firm Reflects only private cost If externalities exist also need social cost: the costs to third parties associated with the provision of the good Recall that demand reflects the value buyers assign to a good/service Reflects only private value If externalities exist also need social benefit/value: the value to third parties associated with the provision of the good 258

4 Pollution: Negative Externality Price of Widgets Social Cost Supply (Private Cost) Consider a coal-powered manufacturing plant making widgets Pollution is a negative externality associated with the production of widgets Firms will produce where S = D They do not account for the social cost Quantity of Widgets Demand To force them to account for the cost to society of higher pollution, government can impose taxes/quotas 259

5 Education: Positive Externality Value of Schooling Supply Consider the value of education to an individual and to society Education yields positive externalities because better-educated voters lead to a better government. Crime rates also drop as the education level of the population rises. Quantity of Schooling Social Value Demand (Private Value) To ensure high levels of education, government can subsidize education, provide it for free, and/or impose regulation to ensure all children receive it 260

6 Internalizing an externality Altering the incentives so that people take account of the external effects of their actions. Because private costs do not account for social costs --> government can impose taxes or regulation to increase private cost to match social costs By doing so, the internalization forces the firm to produce less and therefore lower the size of the negative externality Because private benefit does not account for social benefit --> government can introduce tax breaks, subsidies, and regulation to enhance the private benefit By doing so, the internalization forces the economic agent closer to the higher social benefit point. 261

7 Public Policy towards Externalities Command-and-control: Externalities can be corrected by requiring or forbidding certain behaviors. In the United States, the Environmental Protection Agency (EPA) develops and enforces regulations aimed at protecting the environment. EPA regulations include maximum levels of pollution allowed or required adoption of a particular technology to reduce emissions. 262

8 Public Policy towards Externalities Market-based Policies: Externalities can be internalized through the use of taxes and subsidies. Corrective tax: a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality. These taxes are preferred by economists over regulation, because firms that can reduce pollution with the least cost are likely to do so (to avoid the tax) while firms that encounter high costs when reducing pollution will simply pay the tax. Thus, this tax allows firms that face the highest cost of reducing pollution to continue to pollute while encouraging less pollution over all. 263

9 Public Policy towards Externalities Market-based Policies: Tradable Pollution Permits EPA regulations restrict the amount of pollution that two firms can emit at 300 tons of glop per year. Firm A wants to increase its amount of pollution. Firm B agrees to decrease its pollution by the same amount if Firm A pays it $5 million. Social welfare is increased if the EPA allows this situation. Total pollution remains the same so there are no external effects. If both firms are doing this willingly, it must make them better off. If the EPA issued permits to pollute and then allowed firms to sell them, this would also increase social welfare. Firms that could control pollution most inexpensively would do so and sell their permits, while those who encounter high costs when reducing pollution would buy additional permits. 264

10 Key Takeaways Externalities are the outcomes of decisions made by economic agents that affect bystanders who are not part of the decision-making process Externalities can be both beneficial and harmful The size of the externality can be controlled by government intervention in the form or command-and-control policies or marketbased policies 265

11 Principles of Microeconomics Module 7.2 Public Goods and Common Resources

12 Types of Goods in the Economy Excludable: A person can be prevented from using the good Rival in Consumption: One person s use of the good diminishes other people s use of the good

13 Types of Goods in the Economy Yes Yes Private Goods - Ice-cream cones - Clothing Rival in consumption No Club Goods - Movie theaters - Cable TV Excludable No Common Resources - Fish in the ocean - The environment Public Goods - National defense - Knowledge

14 Provision of Public Goods Because it is difficult to get anyone to pay for public goods (because nonexcludable) à no individual firm will be willing to provide the good Free rider Problem: a person who receives the benefit of a good but avoids paying for it. Example: paving main street in town everyone benefits, no one s use diminishes anyone else s use Can t stop people from using it Therefore à will a firm pay? NO! Due to this market failure à need the government to step in to provide public goods

15 Common Resources Non-excludable but rival in consumption Can t stop people from using The more people use the good the less it can be used by others Fishing in the local pond (or ocean) Limited fish in the pond Everyone can come and fish The more people fish à the less fish for everyone else!

16 Regulating Common Resources Economists have struggled with identifying the best solutions for avoiding the problem with common resources Regulating quantity fished/used Voucher system Time of fishing Need regulation and government involvement to solve these market failures

17 Key Takeaways There are many types of goods in our economy We can group them into four categories based on excludability and rivalry in consumption Because of the problems associated with the provision of public goods and use of common resources these are considered market failures Need government help to control and regulate market failures

18 Principles of Microeconomics Module 7.3 Income Inequality

19 Income Inequality Income inequality refers to the uneven distribution of income in a country Reflects the gap between the rich and everyone else In the US this gap has been growing rapidly

20 Average Income in United States $33,068 Bottom 90%

21 Average Income in United States $295,845 Top 10%

22 Average Income in United States $448,489 Top 5%

23 Average Income in United States $1,260,508 Top 1%

24 Average Income in United States $6,087,113 Top 0.1%

25 Income Inequality in the US On the Rise

26 Real wages have not grown for most

27 Poverty in the United States In 2014: 46.7 million people (14.8%) were in poverty million (21.1%) children under the age of 18 were in poverty. 4.6 million (10%) seniors 65 and older were in poverty.

28 Poverty in the United States 48.1 million Americans lived in food insecure households, including 32.8 million adults and 15.3 million children. 14% of households (17.4 million households) were food insecure. 6% of households (6.9 million households) experienced very low food security. Households with children reported food insecurity at a significantly higher rate than those without children, 19% compared to 12%.

29 Policies to Reduce Poverty Minimum wage laws In-kind transfers Welfare and housing assistance Negative income tax Do not solve the larger issue of growing inequality in the US