CHAPTER 9 (2014)Apunte Inglés
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ECONOMICS. CHAPTER 9
EXTERNALITIES AND PUBLIC COST
THE ECONOMICS OF POLLUTION.
Although pollution is a side effect of activities that provides us with good things, it’s a bad thing.
-Pollution is a side effect of useful activities, so = Optimal quantity of pollution isn’t zero.
COSTS AND BENEFITS OF POLLUTION.
Marginal cost of pollution = Additional cost imposed on society by an additional unit of pollution.
Marginal social cost = Additional gain on society by an additional unit of pollution.
SOCIALLY OPTIMAL QUANTITY = Quantity of pollution that society would choose if all the costs and benefits of pollution were fully accounted for.
Marginal social cost = Sum of the willingness to pay among all the members of society.
EXTERNAL COSTS AND BENEFITS.
External cost: Uncompensated cost that an individual or firm imposes on others.
External benefit: Benefit that an individual or firm confers on others without receiving compensation.
*Pollution is an example of external cost.
External cost = Negative externality External benefit = Positive externality *Externalities (both positive and negative) lead to individual decisions that are not optimal for society as a whole — MARKET FAILURE! HOW TO HANDLE IT? ECONOMICS. CHAPTER 9 1-PRIVATE SOLUTIONS TO EXTERNALITIES.
Private sector can lead with all externalities.
-Individuals have incentives to make mutually beneficial deals where they consider externalities when making decisions.
*When individuals take externalities into account = Internalize the externality.
TRANSACTION COSTS prevent individuals from making efficient deals 2-PUBLIC SOLUTIONS TO EXTERNALITIES.
Fix standards: Rules that protect something (for example the environment) by specifying actions by producers and consumers.
Taxation: (Emission tax) is a tax that depends on the amount of pollution a firm produces.
Extend licenses: License that limits the quantity of something (pollution for example) that a firm can produce.
Subsidy positive activities: Investigation, universities, public health, etc., to preserve environment.
CHARACTERISTICS OF GOODS.
Excludable: The supplier of that good can prevent people who don’t pay from consuming it.
Rival in consumption: The same unit of the good cannot be consumed by more than one person at the same time.
PRIVATE GOOD = Excludable + rival in consumption *Can be efficiently produced and consumed in a competitive market.
PUBLIC GOOD = Nonexcludable + nonrival in consumption COMMON RESOURCES = Nonexcludable but rival ARTIFICIALLY SCARCE GOODS = Excludable but nonrival ECONOMICS. CHAPTER 9 Goods that are non-excludable suffer from the free-rider problem: Individuals have no incentive to pay for their own consumption and instead will take “free ride” on anyone who does pay it.
When goods are non-rival in consumption, the efficient price for consumption is zero.