Bài giảng Microeconomics - Chapter 11 Externalities and Property Rights

Externalities and Property Rights0What is Chapter 11 about?1I. External Costs and BenefitsSlide 11 - 22ExternalitiesExternal costA cost that falls on people other than those who pursue the activityAka negative externalityExternal benefitA benefit received by people other than those who pursue the activityAka positive externalityNote: an externality is an impact on others which is NOT reflected in prices3Externalities and the Invisible HandThe ‘invisible hand’ model assumes conditions of perfect competitionwhere externalities do not existWith externalities present:Free markets cannot necessarily be expected to produce socially efficient outcomeExample: Bee-keeper and orchards4Externalities and Resource AllocationIndividuals considering only their own costs and benefits will tend to engageToo much in activities that generate Negative externalitiesMarket Price will overestimate benefit of activityToo little in activities that generate Positive externalitiesMarket Price will underestimate benefit of activity5Fig. 11.1How External Costs and Benefits Affect Resource Allocation6Coase TheoremCoase TheoremIf there is no negotiation cost, people can negotiate the purchase and sale of the right to perform activities that cause externalitiesIndividual negotiation (if costless) gives efficient solutions to the problems caused by externalitiesThe efficient solution does not depend upon who has the property rightThe distribution of benefits and costs does depend upon who has the property right7Table 11.2Costs and Benefits of Eliminating Toxic Waste8Legal Remedies for ExternalitiesNegotiation is not always practicalE.g. pollution by carsIn practice, many laws and regulations try to solve externality problemsThe burden of adjustment is often placed on those who can adjust at the lowest cost9Optimal Amount of ExternalitiesThe optimal amount of negative externalities is not necessarily zeroEliminating pollution has BOTH benefits and also costsThe best policy will eliminate pollution until the cost of further abatement equals the benefit of further abatementThe cleanup effort should be expanded only until the marginal benefit equals the marginal cost10II. Property Rights and the Tragedy of the CommonsSlide 11 - 1111Tragedy of the CommonsThe tendency for a resource that has no price to be used until its marginal benefit falls to zeroOne person’s use of commonly held property imposes an external cost on others, reducing the property’s valueExamples: Grazing lands, oceansOne solution - private ownershipAlternative ? Social norms / laws ??How to adjust to changing times ? 12More Tragedies of the CommonsDefining private ownership rights does not always solve the tragedy of the commons. Enforcement may not be feasibleHarvesting timber on remote public landHarvesting whales in international watersControlling multinational environmental pollution13III. Positional ExternalitiesSlide 11 - 1414Positional ExternalityA Positional Externality occurs when:An increase in one person’s performance reduces the expected reward of another person – I.e. reward depends on relative performanceAny step to improve one side’s relative position must necessarily worsen the other’sInvisible hand generates “arms race” and over investment15Positional Arms RacePositional externalities lead to a positional arms race:A series of mutually offsetting investments in performance enhancement that is stimulated by positional externalitiesExamples: First firm to innovate; clients who hire best lawyer; firms that promote hardest working employee; motorcycle horsepower16Positional Arms Control AgreementPositional arms control agreement:An agreement in which contestants attempt to limit mutually offsetting investments in performance enhancementTo observe these agreements, ask yourself:What form do the investments in performance enhancement take?What steps have contestants taken to limit these investments?17Agreements as Formal Rules:Some ExamplesCampaign spending limitsRoster limits in Professional sportsSpecification limits in auto racingArbitration agreementsBinding agreements Mandatory starting dates for kindergartenProhibits holding children back from starting school so that they are ahead of their classmates18Social Norms as “Arms Control Agreements”Nerd norms – if professors grade on a curve: Students try to limit the time spent on study by labeling ‘nerds’ those who work harderFashion normsTrying to be on the fashion edge increases wasteNorms of tasteGreater acceptance of what was once “bad taste”Norms against vanityGreater acceptance of cosmetic surgery for cosmetic rather than reconstructive purposes19End of Chapter SlidesConcept Maps meant for student printouts follow.Concept Map slides are also available in pdf format.Slide 11 - 2020What is Chapter 11 about?21I. External Costs and Benefits22II. Property Rights and the Tragedy of the Commons23III. Positional Externalities24Summary of Chapter 1125