Externalities Today: The fundamentals of externality theory.
CONTROL EXTERNALITIES DEFINITION: UNINTENDED SIDE IMPACT OF AN ACTION BAD – “NEGATIVE...
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Transcript of CONTROL EXTERNALITIES DEFINITION: UNINTENDED SIDE IMPACT OF AN ACTION BAD – “NEGATIVE...
![Page 1: CONTROL EXTERNALITIES DEFINITION: UNINTENDED SIDE IMPACT OF AN ACTION BAD – “NEGATIVE EXTERNALITY” – POLLUTION GOOD – “POSITIVE EXTERNALITY” – EDUCATION.](https://reader030.fdocuments.us/reader030/viewer/2022032523/56649d925503460f94a78023/html5/thumbnails/1.jpg)
CONTROL EXTERNALITIES
DEFINITION: UNINTENDED SIDE IMPACT OF AN ACTION
BAD – “NEGATIVE EXTERNALITY” – POLLUTION
GOOD – “POSITIVE EXTERNALITY” – EDUCATION
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PROBLEM OF AN EXTERNALITY
ENTITY CREATING THE EXTERNALITY DOESN’T FACE THE FINANCIAL COST OR BENEFIT FOR IT
FOR A NEGATIVE EXTERNALITY – DOESN’T PAY THE COST
FOR A POSITIVE EXTERNALITY – DOESN’T RECEIVE THE BENEFIT
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PROBLEM OF AN EXTERNALITY (CON’T.)
RESULT:
TOO MANY PRODUCTS/SERVICES WITH NEGATIVE EXTERNALITIES ARE MADE
TOO FEW PRODUCTS/SERVICES WITH POSITIVE EXTERNALITIES ARE MADE
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ONE SOLUTION – NEGOTIATION
SPARKS FROM TRAINS IN 19TH CENTURY CREATED FIRES IN NEARBY FARMLAND
RAILROAD AND FARMERS NEGOTIATED – FARMERS PAID FOR SPARK RETARDANT EQUIPMENT ON TRAINS
SMOKER AND NON-SMOKER CAR-POOLING – MAYBE SMOKER PAYS FOR GAS
RESULT DEPENDS ON WHO HAS “PROPERTY RIGHTS”
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BUT NEGOTIATION OFTEN DOESN’T WORK
WHEN LARGE NUMBERS OF PEOPLE ARE IMPACTED
BEST SOLUTION: TAX THE ACTION GENERATING THE NEGATIVE EXTERNALITY, WHERE TAX EQUALS COST OF HARM DONE
SUBSIDIZE THE ACTION GENERATING THE POSITIVE EXTERNALITY, WHERE SUBSIDY EQUALS VALUE OF BENEFIT DONE
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EXAMPLES OF SUBSIDIES
SUBSIDIZED FLU SHOTS – I’M LESS LIKELY TO GET THE FLU IF OTHERS ARE IMMUNIZED
SUBIDIZED EDUCATION – I BENEFIT FROM OTHERS BEING MORE ECONOMICALLY PRODUCTIVE – MORE SPENDING OPPORTUNITIES, OTHERS PAY MORE TAXES AND REQUIRE LESS FROM THE GOVERNMENT
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EXAMPLES OF TAXES
CIGARETTE TAXES – SECOND AND THIRD HAND SMOKE MAY BE CONSIDERED A NEGATIVE EXTERNALITY BY MANY PEOPLE
ALCOHOL TAXES – TO “TAX” USERS FOR INCREASED LIKELIHOOD OF UNSAFE BEHAVIOR (TO OTHERS) AFTER DRINKING
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A NEGATIVE EXTERNALITY TAX THAT HAS BEEN PROPOSED
CARBON TAX: TAX ANY ACTIVITY THAT EMITS CARBON AND POTENTIALLY POLLUTES THE AIR AND LEADS TO ATMOSPHERIC WARMING
-- DRIVING -- POWER (ELECTRICITY) USE IF POWER IS GENERATED FROM A FUEL EMITTING CARBON
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ONE ISSUE WITH A NEGATIVE EXTERNALITY TAX
WHAT TO DO WITH THE REVENUE?
EITHER: * USE TO MITIGATE THE HARM DONE BY THE NEGATIVE EXTERNALITY * RETURN TO USERS SO FINANCIAL POSITION NOT HARMED
DON’T USE FOR SOMETHING UNRELATED TO THE POLLUTANT
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TAX/SUBSIDY APPROACH TO EXTERNALITIES AND FREE CHOICE
FREE CHOICE STILL PRESERVED, BUTNOW CHOICES CREATING NEGATIVE EXTERNALITIES PAY THE COST, AND CHOICES CREATING POSITIVE EXTERNALILITIES ARE REWARDED
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PROBLEMS WITH THE TAX/SUBSIDY APPROACH TO EXTERNALITIES
MEASURING THE COSTS FOR HARM FROM NEGATIVE EXTERNALITIES AND THE BENEFITS FROM POSITIVE EXTERNALITIES * MAY VARY SIGNIFICANTLY BETWEEN PEOPLE (EXAMPLE – AVERSION TO CIGARETTE SMOKE) * IN SOME CASES, OUTRIGHT REQUIREMENT OR PROHIBITION IS BEST APPROACH MANDATORY SCHOOLING TO AGE 16 PROHIBITED SMOKING ON PLANES
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VARIATION ON A THEME – “CAP AND PERMIT” FOR POLLUTIONTHREE STEP PROCESS
1. EXPERTS DECIDE HOW MUCH POLLUTION IS ACCEPTABLE
2. SELL PERMITS TO POLLUTE BASED ON ACCEPTABLE LEVEL
3. ALLOW PERMITS TO BE TRADED
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HOW FAR TO GO WITH EXTERNALITIES?
SHOULD CONSUMPTION OF CERTAIN FOODS LINKED TO OBSEITY BE TAXED AS A NEGATIVE EXTERNALITY?
* WHAT IS THE NEGATIVE EXTERNALITY – IMPACT OF OBSEITY ON HEALTH CARE COSTS, SO EVEN “FIT” PEOPLE PAY HIGHER COSTS FOR DOCTORS & HOSPITALS?