Bài giảng Macroeconomics - Chapter 9: Externalities and Property Rights

Chapter 9: Externalities and Property RightsDefine negative and positive externalities and analyze their effect on resource allocationsDiscuss and explain the Coase TheoremExplain how the effects of externalities can be remediedDiscuss why the optimal amount of an externality is almost never zeroIllustrate the tragedy of the commons and show how private ownership is a way of preventing itDefine positional externalities and their effects, and show how they can be remediedExternal Costs and BenefitsAn external cost is a cost of an activity that falls on people other than those who pursue the activityAlso called a negative externalityAn externality is the name given to an external cost or external benefit of an activityAn external benefit is a benefit of an activity received by people other than those who pursue the activityAlso called a positive externalityExternalities Affect Resource AllocationExternalities reduce economic efficiencySolutions to externalities may be efficientWhen efficient solutions to externalities are not possible, government intervention or other collective action may be usedRemedying ExternalitiesWith externalities, private market outcomes do not achieve the largest possible economic surplusCash is left on the tableFor example, with monopolies, output is lower than with prefect competitionIntroduction of coupons and rebates expands the marketWith externalities, actions to capture the surplus are likelyThe Coase TheoremThe Coase Theorem says that if people can negotiate the right to perform activities that cause externalities, they can always arrive at efficient solutions to problems caused by externalitiesNegotiations must be costlessSometimes those harmed pay to stop pollutionFitch pays AbercrombieSometimes polluter buys the right to polluteAbercrombie pays Fitch The adjustment to the externality is usually done by the party with the lowest costLegal Remedies for ExternalitiesIf negotiation is costless, the party with the lowest cost usually makes the adjustmentPrivate solution is generally adequateWhen negotiation is not costless laws may be used to correct for externalitiesThe burden of the law can be placed on those who have the lowest costExamples of Legal Remedies for ExternalitiesNoise regulations (cars, parties, honking horns)Most traffic and traffic-related lawsZoning lawsBuilding height and footprint regulations (sunshine laws)Air and water pollution lawsOptimal Amount of Negative ExternalitiesQuantity of PollutionMC & MBMCQMC = MBMBOptimal amount of pollutionTragedy of CommonsWhen use of a communally owned resource has no price, the costs of using it are not consideredUse of the property will increase until MB = 0This is known as the tragedy of the commonsSuppose 5 villagers own land suitable for grazingEach can spend $100 for either a steer or a government bond that pays 13%Villagers know what everyone before them has doneSteer graze on the commonsValue of the steer in year 2 depends on herd sizeThe Effect of Private OwnershipThe villagers decide to auction off the rights to the commons Auction makes the highest bidder consider the opportunity cost of grazing additional steerVillagers can borrow and lend at 13%.One steer is the optimal numberWinning bidder pays $100 for the right to use the commonsThe Effect of Private OwnershipThe winning bidder starts the yearSpends $100 in savings to buy a yearling steerBorrows $100 at 13% to get control of commonsThe winning bidder ends the yearSells the steer for $126Gets original $100 back$13 opportunity cost of buying a steer$13 interest on loan for the commonsEconomic surplus of the village is(4 x $13) + $26 = $78Positional ExternalitiesHighest compensation goes to the best performerStandard is relative, not absoluteEach player increases spending to increase probability of winningSum of all these investments > collective payoffTotal payout is fixed, so players' group has no gainsPositional ExternalitiesRelative performance determines reward Positional externalities occur when an increase in one person's performance reduces the expected reward of anotherA positional arms race is a series of mutually offsetting investments in performance enhancement that is stimulated by a positional externalityA positional arms control agreement attempts to limit the mutually offsetting investments in performance enhancements by contestantsExamples of Positional Arms Control AgreementsCampaign spending limitsRoster limitsArbitration agreementsMandatory starting dates for kindergartenNerd normsFashion normsNorms of tasteNorms against vanityExternalities and Property RightsExternalities and Property RightsRemediesCoase TheoremLawsTaxes & SubsidiesTragedy of the CommonsPositional ExternalitiesEffects of ExternalCostsEffects of ExternalBenefits