19 Externalities The market tends to overproduce. Spillover CostsSpillover Benefits The market tends...
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Transcript of 19 Externalities The market tends to overproduce. Spillover CostsSpillover Benefits The market tends...
19 Externalities
The market tends to overproduce.
Spillover Costs Spillover Benefits
The market tends to underproduce.
200 400 600
30
60
90
Pollution (tons)
Cle
an
-up
cost
(00
0$
)The Economics of Pollution
Company A produces 40,000 units and emits 600 tons of pollution. Clean-up is costly.
100
30,000
300
30,000
0
Pollution(tons)
Clean-upcost
MCper ton
$90,000
$40,000
$10,000
200
400
$0600
200 400 600
200
400
600
Pollution (tons)
Marg
inal b
en
efit
($)
The marginal “benefit” of pollution is the cost of cleaning-up an extra ton.
Marginal “Benefit” of Pollution
MB: Company A
MB: Company B
Company B has higher clean-up costs.
20,00040,00060,000
200
400
600
Pollution (tons)
MC
and
MB
($
)
Costs and benefits of pollution for the economy as a whole.
Costs and Benefits of Pollution
MBMC
30,000 tons of pollution is optimal.
the benefit from an extra ton of pollution is offset by the cost
without regulation, companies will emit 60,000 tons
200 400 600
200
400
600
Pollution (tons)
Marg
inal b
en
efit
($)
A standard might require all companies to cut emissions to 300 tons.
Environmental Standards
MB: Company A
MB: Company B
The marginal and total cost for Company B is higher.
$150
$300
A
CompanyClean-up
costMC
per ton
$22,500
$45,000B
200 400 600
200
400
600
Pollution (tons)
Marg
inal b
en
efit
($)
Alternatively, the government could impose a tax of $200 per ton.
Emission Taxes
Each firm chooses an optimal level of pollution
Total pollution is the same but at lower cost.
$200
$200
A
CompanyClean-up
costMC
per ton
$40,000
$20,000B
Clean-up cost
Emissions tax
Total
$0
600tons
400tons
200tons
0tons
$120,000
$120,000
$20,000 $80,000 $180,000
Clean-up cost
Emissions tax
Total
$0
600tons
400tons
200tons
0tons
$120,000
$120,000
$10,000 $40,000 $90,000
Firms Choose How Clean to Be
Firm A
Firm B
Marketable Pollution Permits
The government allocates permits to firms.
Firms are allowed to buy and sell permits.
Permits encourage the lowest cost clean-up to be done first.
Environmental groups can buy permits to reduce pollution.
Marginal Benefit of Transactions
2 4 6 8 10 12
4
8
12
$20
16Pri
ce
Quantity
$8
$8
$4
$5
Marginal benefit of 2nd unit is $16.
Marginal benefit of 5th unit is $9.
Quantity
Pri
ce
100 200 300 400 500
5
10
15
20
25
30
35
40
$2,625
$2,250
$2,250
External Costs (Before a Tax)
Large consumer and producer surplus if
government pays for the clean-up.
Consumer Surplus
Producer Surplus
ExternalCost
Net benefit = $1,875
Quantity
Pri
ce
100 200 300 400 500
5
10
15
20
25
30
35
40
Marginal Benefits and Costs
Marginal benefit of 100th unit is $20.
Marginal cost of 100th unit is
$7.50.
Consumer Surplus
Producer Surplus
ExternalCost
Quantity
Pri
ce
100 200 300 400 500
5
10
15
20
25
30
35
40
Marginal Benefits and Costs
Consumer Surplus
Producer Surplus
ExternalCost
200 = optimal quantity
$10 = optimal tax
Marginal benefit of 200th unit is $10.
Marginal cost of 200th unit is $10.
Quantity
MC
& M
B
100 200 300 400 500
5
10
15
20
25
30
35
40
Marginal cost
Marginal benefit
Marginal Benefits and Costs