Chapter 5 externalities 我们都知道，毫无顾及的自私是一种不道德； 我们现在还知道，它也是一种不良的经济学。 富兰克林 • D • 罗斯福 Weidong CHEN 1
Chapter 5 externalities Externality: the activity of one entity (a person or a firm)directly affects the welfare of another in a way that is outside the market mechanism. Because one entity directly affects the welfare of another entity that is “external” to it. q If one activity put some cost on others without pay , this effect called negative externality q If one activity bring benefit to others without pay, this effect called positive externality Weidong CHEN 2
externalities q. Externalities affect the interest of others. The entities who exert externalities to others can share the benefits or bare the cost of others, though they do not take part in the activity directly. q. Externalities may lead to the Pareto inefficiency of resource allocation ØMaybe too much scarce resources is used for the activities of having negative externalities on the social level. ØOr, vice verse, too little scarce resources is used in the activities which have positive externalities. Weidong CHEN 3
Externalities: examples qactivities of positive externalities Ø A district with beautiful scenery or high quality school may improve the market value of your house Ø Good habit of driving reduce threat of traffic accident Ø The vaccination against some infectious disease Ø technical change Weidong CHEN 4
Externalities : examples activities of negative externalities ： Ø The pollution of air, water Ø Noise made by your neighbor Ø Traffic jam Ø Second hand smoking Weidong CHEN 5
The nature of externalities l They can be produced by consumers as well as firms l Externalities are reciprocal in nature l Externalities can be positive l Public goods can be viewed as a special kind of externality: the boundary of them Weidong CHEN 6
Graphical analysis Weidong CHEN • From private side, if MB >MPC, then he can produce; or else stop producing. The profit maximized output is at the point where the MPE equal to MB • From society’s point of view, production should occur as long as the MB to the society exceeds the MSC, which has two components. Where is the efficiency output? 7
The Nature of Externalities. Graphical Analysis MSC = MPC + MD $ MPC h d g c 0 Socially efficient output b a Q* MD f MB e Q 1 Q per year Weidong CHEN Actual output 8
Some implications 1. private markets need not produce the socially efficient output level. When a good generates a negative externality, too much of it is produced relative to the efficient output. 2. if Bart is forced to cut back from Q 1 to Q*, he therefore loses the differ. between the MB and MPC curves for each unit of production. Meanwhile, Lisa’s gain is abfe. In sum, Bart would lose area dcg and Lisa would gain area cdhg. Provided that society views a dollar to Bart asa equivalent to a dollar to Lisa, then moving from Q 1 to Q*yields a net gain to society equal to the differ. between cdhg and dcg, which is dhg. 3. the analysis implies that, zero pollution is not socially desirable. Finding the right amount of pollution requires trading off its benefits and costs. 4. difficult practical questions arise when it comes to Weidong CHEN 9
What Pollutants Do Harm? Empirical Evidence: What is the Effect of Pollution on Health? l What Activities Produce Pollutants? l What is the Value of the Damage Done? l Empirical Evidence: The Effect of Air Pollution on Housing Values Weidong CHEN 10
How to deal with externalities? l Private responses Coase theorem, merger, social convention l Public responses To control the output of the goods which produced the pollution: tax and subsidy To control the pollution level: emissions fees , cap-and-trade, command-control regulation Weidong CHEN 11
Bargaining and the Coase Theorem • The root cause of the inefficiencies associated with externalities is the absence of property rights. • The condition for bargaining ： MD>(MB-MPC) • The payment Lisa would be willing to make exceeds MB－MPC at every output level to the right of Q*. In contrast, to the left of Q*, the amount of money Bart would demand to reduce his output would exceed what Lisa would be willing to pay. Hence , Lisa pays Bart to reduce output just to Q*. Regardless of how the gains from the bargain are divided, production ends up at Q*. Weidong CHEN 12
Bargaining and the Coase Theorem MSC = MPC + MD $ MPC h d g c MD MB 0 Q* Q 1 Weidong CHEN Q per year 13
The Coase Theorem – Provided that transaction costs are negligible, an efficient solution to an externality problem is achieved as long as someone is assigned property rights, independent of who is assigned those rights l Assumptions necessary for Coase Theorem to work l – The costs to the parties of bargaining are low – The owners of resources can identify the source of damages to their property and legally prevent Weidong CHEN 14 damages
mergers l One way to deal with an externality is to “internalize”it by combining the involved parties. – For instance, if Bart purchased the fishery, he would willingly produce less output than before, because at the margin doing so would increase the profits of his fishery subsidiary more than it decreased the profits from his factory subsidiary. Weidong CHEN 15
Social conventions Some moral percepts induce people to empathize with others, and hence internalize the externalities their behavior may create 一些道德格言具有 校正市场缺位的作 用，使得人们把自 己的行为产生的外 部性内生化 Weidong CHEN 16
Public Responses to Externalities - Taxes MSC = MPC + MD $ (MPC + cd) Pigouvian tax revenues i j MPC d c MD MB 0 Q* Q 1 Weidong CHEN Q per year 17
Public response to externalities • Pigouvian tax：tax each unit of a polluter’s output in an amount just equal to the marginal damage it inflicts at the efficient level of output. In figure 5. 4, the marginal damage at the efficient output Q* is the pigouvian tax, cd. • Bart’s new marginal cost schedule is found by adding cd to MPC at each level of output, this involves shifting up MPC by the vertical distance cd. • Profit maximization output occurs at the intersection of MB and MPC＋cd • Total tax revenue is cd×id • There are practical problems in implementing a Pigouvian tax system. Weidong CHEN 18
Public Responses to Externalities Subsidies MSC = MPC + MD $ (MPC + cd) MPC Pigouvian subsidy i j 0 d c k f g h e Q* Q 1 Weidong CHEN MD MB Q per year 19
Pigouvian subsidy Public response: subsidies：in figure 5. 5, Bart’s NMB at output Q 1 is the distance between MB and the horizontal axis, ge. The MC of producing Q 1 is the sum of the amount pays for inputs and the subsidy of cd that he forgoes by producing. So the perceived MC schedule is MPC＋cd. At output Q 1, this is distance ek (= eg+gk), but ek exceeds the MB, ge. As long as the MC exceeds the MB at Q 1, it does not make sense for Bart to produce this last unit of output. Instead, he should forgo its production and accept the subsidy. The same line of reasoning for Bart not to produce any output more than Q*. Weidong CHEN 20
Compare subsidy with taxation The distributional consequences of the tax and subsidy schemes differ dramatically. Instead of having to pay the tax of idcj, Bart receives a payment equal to the number of units of forgone production, ch, times the subsidy per unit, cd, which equals rectangle dfhc. That an efficient solution can be associated with different income distribution. Subsidy may induce more firms to join in the market, may be ethically undesirable. Weidong CHEN 21
Emissions Fee $ MC f* MSB 0 e* Weidong CHEN Pollution reduction 22
Uniform Pollution Reductions MCH Bart’s Tax Payment Homer’s Tax Payment MCB f= $50 50 75 90 Bart’s pollution reduction Weidong CHEN 25 50 75 90 Homer’s pollution reduction 23
l cap-and-trade rules指 的就是“总量管制和交易”规则。 所谓“总量管制和交易”，是指在限制温室气体排放 总量的基础上，通过买卖行政许可的方式来进行排 放。具体来说，就是美国等 发达国家对于空气品质 未达标准的污染源（这些污染源多分布在发展中国 家），依照其空气品质改善目标配给“容许排放权”， 并规范其逐年应削减的排放量比例、 达成的目标年 及最终容许排放权。各污染源取得容许排放权后， 即能于开放性市场中自由进行交易买卖。这一机制 为《京都议定书》首创，旨在通过对排放权的限制 来减少碳排放量。 Cap这个词我们最熟悉的意思是“帽子”，而在capand-trade这个表达 当中，cap表示the upper limit on what is allowed，即“（允许的）上限”，比如，“薪 水上限”pay cap，“价格上限”price cap等。上面报道 中提到的“限制温室气体排放总量”也就是to cap the emission of greenhouse gases或者greenhouse gas emission cap Weidong CHEN 24
Cap-and-Trade MCH b MCB f= $50 a 10 50 75 90 Bart’s pollution reduction Weidong CHEN 25 50 75 90 Homer’s pollution reduction 25
Emissions Fee v Cap-and. Trade l Responsiveness to Inflation l Responsiveness to Cost Changes EF limits the cost of reducing pollution but leads to changes in emissions as things change CAT limits the amount of emissions but leads to changes in the cost of reducing pollution as the economy changes l Responsiveness to Uncertainty Weidong CHEN 26
Cap-and-Trade v Emissions Fee MC’ $ MC* f* MSB 0 ef e’ e* Weidong CHEN Too little pollution reduction Too much pollution reduction Pollution reduction 27
Cap-and-Trade v Emissions Fee MC’ $ MC* f* MSB 0 ef e’ e* Weidong CHEN Too little pollution reduction Too much pollution reduction Pollution reduction 28
Distributional Effects l Emissions fee l Cap-and-Trade Weidong CHEN 29
Command-Control Regulation l Incentive-based regulations l Command-control regulations – technology standard – performance standard l Is command-control ever better? – hot spots Weidong CHEN 30
The U. S. Response l Clean Air Act – 1970 amendments – Command-control in the 70 s – How well did it work? Weidong CHEN 31
Progress with Incentive-based Approaches l Policy Perspective: Cap-and-Trade for Sulfur Dioxide l Policy Perspective: Cap-and-Trade to Protect Fisheries and Wildlife – individual transferable quotas Weidong CHEN 32
Implications for income distribution l Who benefits Higher income family or the poor family？ l Who bears the costs? – Some of the polluters’ former workers may suffer unemployment in the short run and be forced to work at lower wages in the long run – If the commodities so affected are consumed primarily by high-income groups, the distribution of real income becomes more equal, other things being the same, and vice versa. – Some evidence from empirical study Weidong CHEN 33
Positive Externalities $ MC MSB = MPB + MEB MPB MEB R 1 R* Weidong CHEN Research per year 34
Positive externalities • When an individual or firm produces positive externalities, the market underprovides the activity or good, but an appropriate subsidy can remedy the situation. • Given a subsidy equal to the marginal external benefit at the optimum, distance ab. Weidong CHEN 35
A Cautionary Note l Requests for subsidies – Resource extracted from taxpayers Every subsidy embodies a redistribution from taxpayers as a whole to the recipients. If the subsidy has good efficiency consequences, its distributional implications may not be desirable. l An activity is beneficial per se does not mean that a subsidy is required for efficiency. – Market does not always fail l Policy Perspective: Owner-Occupied Housing Weidong CHEN 36
小结 当一个人的活动在市场机制之外影响另一个 人时，就产生了外部性。一般来说，外部性 之所以存在，是因为缺乏可行的产权。 l 外部性造成市场价格偏离社会成本，引起无 效率的资源配置。 l 科斯定理表明，如果产权确立了，私人各方 通过讨价还价可以达到效率产量。 l 庇古税是一种对污染课征的税收，税额等于 效率产量水平的边际社会损害，这种税使生 产者产生私人动机，使污染量不超过有效数 量。 l Weidong CHEN 37
小结 l 对不产生污染的生产进行补贴，会使生产者 的污染不超过效率水平。但是，不同可能导 致生产过多，在管理上行困难，并且有人认 为它不符合道德规范。 污染权可以在市场上进行交易。这可以固定污染的 总水平，在管理者不能确定污染者对庇古税会如何 反应时，它具有优势。 l 规制很可能是无效率的，因为对于不同的企业、地 点和人群，污染减少的社会价值各有不同。但是， 这是环境政策中应用最广泛的一种形式－也是令经 济学家失望的原因。一个主要的例子是美国的《清 洁空气法》。 l 正外部性一般导致一种活动提供不足。补贴可以解 Weidong CHEN 38 决这个问题，但是必须注意避免滥用补贴。 l
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