Econ 101: Principles of Microeconomics - Chapter 17 - Externalities
Microeconomics 2 John Hey. Lecture 32 Externalities – where the actions of one agent directly...
-
Upload
vincent-cain -
Category
Documents
-
view
216 -
download
0
Transcript of Microeconomics 2 John Hey. Lecture 32 Externalities – where the actions of one agent directly...
Lecture 32
• Externalities – where the actions of one agent directly affects the welfare of another (not indirectly through a market).
• In consumption…• …can be positive (nice smells from someone else)…• …or negative.• In production…• …can be positive (my factory provides heat to yours)…• …or negative.• In this lecture I will just analyse negative externalities.
Bari"Se Parigi avesse il mare, sarebbe una piccola Bari"
• My first example is inspired by my 7 years in Bari. (pictures courtesy of Wikipedia – except the last which is mine)
Externalities in Consumption
• Bad music…
• I like silence. So I do not like bad music played at high volume…
• … but my (mercifully ex-) neighbours in Bari loved terribly bad music at high volume.
• So when they played very loud music it was a negative externality for me.
• What happened? • What should have happened? (Depends on the law.)
• Let’s go to Maple...
Externalities in Production
• Two firms…• One is a steel producer...• …the other is a fishery.• They are both located on the banks of a river.• With the steel producer upstream of the
fishery…• …polluting the river…• …and creating a negative externality for the
fishery.• Let’s return to Maple...
Summary
• The existence of an externality can result in an inefficiency.
• The assignment of property rights, combined with competitive exchange, can eliminate this inefficiency.
• There are clearly other ways; for example in production:• The government can tax the polluter and pay the
proceeds to the polluted (implicitly creating a price for pollution – but not one driven by efficiency).
• The two firms can merge.• The government can issue pollution permits that firms
can trade.