1. N. G R E G O R Y M A N K I W Premium PowerPoint ® Slides by Ron Cronovich 2008 update © 2008 South-Western, a part of Cengage Learning, all rights reserved The Economics of the Public Sector Externalities公共部门经济学 8.1 Externalities( see Textbook Chapter 10 ) 外部性 （见教材第 10 章） 外部性 （见教材第 10 章） 8

2. 1 In this chapter, look for the answers to these questions:  What is an externality?  Why do externalities make market outcomes inefficient?  How can people sometimes solve the problem of externalities on their own? Why do such private solutions not always work?  What public policies aim to solve the problem of externalities?

3. 2 Introduction 简介  Recall one of the Ten Principles from Chap. 1: Markets are usually a good way to organize economic activity.  Lesson from Chapter 7: In the absence of market failures, the competitive market outcome is efficient, maximizes total surplus.

4. 3 Introduction 简介  One type of market failure: externalities.  Externality: the uncompensated impact of one person’s actions on the well-being of a bystander Negative externality: the effect on bystanders is adverse Positive externality: the effect on bystanders is beneficial

5. 4 Introductio 简介  Self-interested buyers and sellers neglect the external effects of their actions, so the market outcome is not efficient.  Another principle from Chapter 1: Governments can sometimes improve market outcomes.

6. 5 Pollution: A Negative Externality 环境污染：负外部性  Example of negative externality: Air pollution from a factory. The firm does not bear the full cost of its production, and so will produce more than the socially efficient quantity.  How govt may improve the market outcome: Impose a tax on the firm equal to the external cost of the pollution it generates

7. 6 Other Examples of Negative Externalities 负外部性的其他例子  the neighbor’s barking dog  late-night stereo blasting from the dorm room next to yours  noise pollution from construction projects  talking on cell phone while driving makes the roads less safe for others  health risk to others from second-hand smoke

8. 7 Positive Externalities from Education 教育的的正外部性  A more educated population benefits society: lower crime rates: educated people have more opportunities, are less likely to rob and steal better government: educated people make better-informed voters  People do not consider these external benefits when deciding how much education to “purchase”  Result: market eq’m quantity of education too low  How govt may improve the market outcome: subsidize cost of education

9. 8 Other Examples of Positive Externalities 正外部性的其他例子  Being vaccinated against contagious diseases protects not only you, but people who visit the salad bar or produce section after you.  R&D creates knowledge others can use.  Renovating your house increases neighboring property values. Thank you for not contaminating the fruit supply!

10. 9 0 1 2 3 4 5 0102030 Q (gallons) P $ The market for gasoline Recap of Welfare Economics 重温福利经济学 Demand curve shows private value, the value to buyers (the prices they are willing to pay) Supply curve shows private cost, the costs directly incurred by sellers The market eq’m maximizes consumer + producer surplus. $2.50 25

11. 10 0 1 2 3 4 5 0 2030 Q (gallons) P $ The market for gasoline Analysis of a Negative Externality 负的外部性的分析 Supply (private cost) External cost = value of the negative impact on bystanders = $1 per gallon (value of harm from smog, greenhouse gases) Social cost = private + external cost external cost

12. 11 0 1 2 3 4 5 0102030 Q (gallons) P $ The market for gasoline Analysis of a Negative Externality 负的外部性的分析 D S Social cost The socially optimal quantity is 20 gallons. At any Q < 20, value of additional gas exceeds social cost At any Q < 20, value of additional gas exceeds social cost At any Q > 20, social cost of the last gallon is greater than its value At any Q > 20, social cost of the last gallon is greater than its value 25

13. 12 0 1 2 3 4 5 0102030 Q (gallons) P $ The market for gasoline Analysis of a Negative Externality 负的外部性的分析 D S Social cost Market eq’m (Q = 25) is greater than social optimum (Q = 20) 25 One solution: tax sellers $1/gallon, would shift supply curve up $1.

14. 13 “Internalizing the Externality” 外部性的内在化  Internalizing the externality: altering incentives so that people take account of the external effects of their actions  In our example, the $1/gallon tax on sellers makes sellers’ costs = social costs.  When market participants must pay social costs, market eq’m = social optimum. (Imposing the tax on buyers would achieve the same outcome; market Q would equal optimal Q.)

15. 14 Positive Externalities 正的外部性  In the presence of a positive externality, the social value of a good includes private value – the direct value to buyers external benefit – the value of the positive impact on bystanders  The socially optimal Q maximizes welfare: At any lower Q, the social value of additional units exceeds their cost. At any higher Q, the cost of the last unit exceeds its social value.

16. A C T I V E L E A R N I N G 1 : Analysis of a positive externality 15 The market for flu shots D S 0 10 20 30 40 50 0102030 P Q $ External benefit = $10/shot  Draw the social value curve.  Find the socially optimal Q.  What policy would internalize this externality?

17. A C T I V E L E A R N I N G 1 : Answers Socially optimal Q = 25 shots To internalize the externality, use subsidy = $10/shot. 16 The market for flu shots D S Social value = private value + external benefit 0 10 20 30 40 50 0102030 P Q $ external benefit 25

18. 17 If negative externality  market quantity larger than socially desirable If positive externality  market quantity smaller than socially desirable To remedy the problem, “internalize the externality”  tax goods with negative externalities  subsidize goods with positive externalities If negative externality  market quantity larger than socially desirable If positive externality  market quantity smaller than socially desirable To remedy the problem, “internalize the externality”  tax goods with negative externalities  subsidize goods with positive externalities Effects of Externalities: Summary

19. 18 Private Solutions to Externalities 外部性的私人解决方案 Types of private solutions:  moral codes and social sanctions, e.g., the “Golden Rule”  charities, e.g., the Sierra Club  contracts between market participants and the affected bystanders

20. 19 Private Solutions to Externalities 外部性的私人解决方案  The Coase theorem: If private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own.

21. 20 The Coase Theorem: An Example 科斯定理：例子 Dick owns a dog named Spot. Negative externality: Spot’s barking disturbs Jane, Dick’s neighbor. The socially efficient outcome maximizes Dick’s + Jane’s well-being. If Dick values having Spot more than Jane values peace & quiet, the dog should stay. Coase theorem: The private market will reach the efficient outcome on its own… See Spot bark.

22. 21 The Coase Theorem: An Example 科斯定理：例子  CASE 1: Dick has the right to keep Spot. Benefit to Dick of having Spot = $500 Cost to Jane of Spot’s barking = $800  Socially efficient outcome: Spot goes bye-bye.  Private outcome: Jane pays Dick $600 to get rid of Spot, both Jane and Dick are better off.  Private outcome = efficient outcome.

23. 22 The Coase Theorem: An Example 科斯定理：例子  CASE 2: Dick has the right to keep Spot. Benefit to Dick of having Spot = $1000 Cost to Jane of Spot’s barking = $800  Socially efficient outcome: See Spot stay.  Private outcome: Jane not willing to pay more than $800, Dick not willing to accept less than $1000, so Spot stays.  Private outcome = efficient outcome.

24. 23 The Coase Theorem: An Example 科斯定理：例子  CASE 3: Jane has the legal right to peace & quiet. Benefit to Dick of having Spot = $800 Cost to Jane of Spot’s barking = $500  Socially efficient outcome: Dick keeps Spot.  Private outcome: Dick pays Jane $600 to put up with Spot’s barking.  Private outcome = efficient outcome. The private market achieves the efficient outcome regardless of the initial distribution of rights.

25. A C T I V E L E A R N I N G 2 : Brainstorming Collectively, the 1000 residents of Green Valley value swimming in Blue Lake at $100,000. A nearby factory pollutes the lake water, and would have to pay $50,000 for non-polluting equipment. A. Describe a Coase-like private solution. B. Can you think of any reasons why this solution might not work in the real world? 24

26. 25 Why Private Solutions Do Not Always Work 为何私人解决方案不是总起作用？ 1. Transaction costs: The costs parties incur in the process of agreeing to and following through on a bargain. These costs may make it impossible to reach a mutually beneficial agreement. 2. Stubbornness: Even if a beneficial agreement is possible, each party may hold out for a better deal. 3. Coordination problems: If # of parties is very large, coordinating them may be costly, difficult, or impossible.

27. 26 Public Policies Toward Externalities 应对外部性的公共政策 Two approaches  Command-and-control policies regulate behavior directly. Examples: limits on quantity of pollution emitted requirements that firms adopt a particular technology to reduce emissions  Market-based policies provide incentives so that private decision-makers will choose to solve the problem on their own.

28. 27 Market-Based Policy #1: Corrective Taxes & Subsidies 矫正税收及补贴  Corrective tax: a tax designed to induce private decision-makers to take account of the social costs that arise from a negative externality  Also called Pigouvian taxes after Arthur Pigou (1877-1959).  The ideal corrective tax = external cost  For activities with positive externalities, ideal corrective subsidy = external benefit

29. 28 Market-Based Policy #1: Corrective Taxes & Subsidies 矫正税收及补贴  Example: Acme, US Electric run coal-burning power plants. Each emits 40 tons of sulfur dioxide per month. SO 2 causes acid rain & other health issues.  Policy goal: reducing SO 2 emissions 25%  Policy options regulation: require each plant to cut emissions by 25% corrective tax: Make each plant pay a tax on each ton of SO 2 emissions. Set tax at level that achieves goal.

30. 29 Market-Based Policy #1: Corrective Taxes & Subsidies 矫正税收及补贴  Suppose cost of reducing emissions is lower for Acme than for US Electric.  Socially efficient outcome: Acme reduces emissions more than US Electric.  The corrective tax is a price on the right to pollute.  Like other prices, the tax allocates this “good” to the firms who value it most highly (US Electric).

31. 30 Market-Based Policy #1: Corrective Taxes & Subsidies 矫正税收及补贴  Under regulation, firms have no incentive to reduce emissions beyond the 25% target.  A tax on emissions gives firms incentive to continue reducing emissions as long as the cost of doing so is less than the tax.  If a cleaner technology becomes available, the tax gives firms an incentive to adopt it.

32. 31 Market-Based Policy #1: Corrective Taxes & Subsidies 矫正税收及补贴  Other taxes distort incentives and move economy away from the social optimum.  But corrective taxes enhance efficiency by aligning private with social incentives.

33. 32 Example of a Corrective Tax: The Gas Tax 矫正税收的例子：汽油税 The gas tax targets three negative externalities:  congestion the more you drive, the more you contribute to congestion  accidents larger vehicles cause more damage in an accident  pollution burning fossil fuels produces greenhouse gases

34. A C T I V E L E A R N I N G 3 : Discussion question Policy goal: Reducing gasoline consumption Two approaches: A. Enact regulations requiring automakers to produce more fuel-efficient vehicles B. Significantly raise the gas tax 33 Discuss the merits of each approach. Which do you think would achieve the goal at lower cost? Who do you think would support or oppose each approach?

35. 34 Market-Based Policy #2: Tradable Pollution Permits 污染许可证制度  Recall: Acme, US Electric each emit 40 tons SO 2, total of 80 tons.  Goal: reduce emissions 25% (to 60 tons/month)  Suppose cost of reducing emissions is $100/ton for Acme, $200/ton for US Electric.  If regulation requires each firm to reduce 10 tons, cost to Acme: (10 tons) x ($100/ton) = $1,000 cost to USE: (10 tons) x ($200/ton) = $2,000 total cost of achieving goal = $3,000

36. 35 Market-Based Policy #2: Tradable Pollution Permits 污染许可证制度  Alternative: issue 60 permits, each allows its bearer one ton of SO 2 emissions (so total emissions = 60 tons) give 30 permits to each firm establish market for trading permits  Each firm can choose among these options: emit 30 tons of SO 2, using all its permits emit < 30 tons, sell unused permits buy additional permits so it can emit > 30 tons

37. 36 Market-Based Policy #2: Tradable Pollution Permits 污染许可证制度 Suppose market price of permit = $150 One possible equilibrium: Acme spends $2,000 to cut emissions by 20 tons has 10 unused permits, sells them for $1,500 net cost to Acme: $500 US Electric emissions remain at 40 tons buys 10 permits from Acme for $1,500 net cost to USE: $1,500 Total cost of achieving goal: $2,000

38. 37 Market-Based Policy #2: Tradable Pollution Permits 污染许可证制度  A system of tradable pollution permits achieves goal at lower cost than regulation. Firms with low cost of reducing pollution sell whatever permits they can. Firms with high cost of reducing pollution buy permits.  Result: Pollution reduction is concentrated among those firms with lowest costs.

39. 38 Tradable Pollution Permits in the Real World 现实世界中的 污染许可证制度  SO 2 permits traded in the U.S. since 1995.  Nitrogen oxide permits traded in the northeastern U.S. since 1999.  Carbon emissions permits traded in Europe since January 1, 2005.

40. 39 Corrective Taxes vs. Tradable Pollution Permits 矫正性税收与污染许可交易  Like most demand curves, firms’ demand for the ability to pollute is a downward-sloping function of the “price” of polluting. A corrective tax raises this price and thus reduces the quantity of pollution firms demand. A tradable permits system restricts the supply of pollution rights, has the same effect as the tax.  When policymakers do not know the position of this demand curve, the permits system achieves pollution reduction targets more precisely.

41. 40 Objections to the Economic Analysis of Pollution 对污染的经济分析的反对  Some politicians, many environmentalists argue that no one should be able to “buy” the right to pollute, cannot put a price on the environment.  However, people face tradeoffs.  The value of clean air & water must be compared to their cost.  The market-based approach reduces the cost of environmental protection, so it should increase the public’s demand for a clean environment.

42. 41 CHAPTER SUMMARY  An externality occurs when a market transaction affects a third party. If the transaction yields negative externalities (e.g., pollution), the market quantity exceeds the socially optimal quantity. If the externality is positive (e.g., technology spillovers), the market quantity falls short of the social optimum.

43. 42 CHAPTER SUMMARY  Sometimes, people can solve externalities on their own. The Coase theorem states that the private market can reach the socially optimal allocation of resources as long as people can bargain without cost. In practice, bargaining is often costly or difficult, and the Coase theorem does not apply.

44. 43 CHAPTER SUMMARY  The government can attempt to remedy the problem. It can internalize the externality using corrective taxes. It can issue permits to polluters and establish a market where permits can be traded. Such policies often protect the environment at a lower cost to society than direct regulation.

45. N. G R E G O R Y M A N K I W Premium PowerPoint ® Slides by Ron Cronovich 2008 update © 2008 South-Western, a part of Cengage Learning, all rights reserved 8.2 Public Goods and Common Resources （ see Textbook Chapter11) （ see Textbook Chapter11) 公共物品和公有资源 公共物品和公有资源 ( 见教材第 11 章） ( 见教材第 11 章）

46. 45 In this chapter, look for the answers to these questions:  What are public goods? What are common resources? Give examples of each.  Why do markets generally fail to provide the efficient amounts of these goods?  How might the government improve market outcomes in the case of public goods or common resources?

47. 46 Introduction  We consume many goods without paying: parks, national defense, clean air & water.  When goods are free, the market forces that normally allocate resources are absent.  The private market may fail to provide the socially efficient quantity of such goods.  One of the Ten Principles from Chapter 1: Governments can sometimes improve market outcomes.

48. 47 Important Characteristics of Goods 商品的重要特征  A good is excludable if a person can be prevented from using it. excludable: fish tacos, dial-up internet service not excludable: FM radio signals, national defense  A good is rival in consumption if one person’s use of it diminishes others’ use. rival: fish tacos not rival: An MP3 file of Kayne West’s latest single

49. 48 The Different Kinds of Goods 商品的不同类型 Private goods: excludable, rival in consumption example: food Public goods: not excludable, not rival example: national defense Common resources: rival but not excludable example: fish in the ocean Natural monopolies: excludable but not rival example: cable TV

50. 49 A C T I V E L E A R N I N G 1 : Categorizing roads  A road is which of the four kinds of goods?  Hint: The answer depends on whether the road is congested or not, and whether it’s a toll road or not. Consider the different cases. 49

51. 50 A C T I V E L E A R N I N G 1 : Answers  Rival in consumption? Only if congested.  Excludable? Only if a toll road.  Four possibilities uncongested non-toll road: public good uncongested toll road: natural monopoly congested non-toll road: common resource congested toll road: private good 50

52. 51 The Different Kinds of Goods 商品的不同类型  This chapter focuses on public goods and common resources.  For both, externalities arise because something of value has no price attached to it.  So, private decisions about consumption and production can lead to an inefficient outcome.  Public policy can potentially raise economic well-being.

53. 52 Public Goods 公共产品  Public goods are difficult for private markets to provide because of the free-rider problem.  Free rider: a person who receives the benefit of a good but avoids paying for it If good is not excludable, people have incentive to be free riders, because firms cannot prevent non-payers from consuming the good.  Result: The good is not produced, even if buyers collectively value the good higher than the cost of providing it.

54. 53 Public Goods 公共产品  If the benefit of a public good exceeds the cost of providing it, govt should provide the good and pay for it with a tax on people who benefit.  Problem: Measuring the benefit is usually difficult.  Cost-benefit analysis: a study that compares the costs and benefits of providing a public good  Cost-benefit analyses are imprecise, so the efficient provision of public goods is more difficult than that of private goods.

55. 54 Some Important Public Goods 一些重要的公共产品  National defense  Knowledge created through basic research  Fighting poverty

56. 55 Common Resources 公共资源  Like public goods, common resources are not excludable. cannot prevent free riders from using little incentive for firms to provide role for govt: seeing that they are provided  Additional problem with common resources: rival in consumption each person’s use reduces others’ ability to use role for govt: ensuring they are not overused

57. 56 The Tragedy of the Commons 共有资源的悲剧  A parable that illustrates why common resources get used more than is socially desirable.  Setting: a medieval town, where sheep graze on common land.  As the population grows, the # of sheep grows.  The amount of land is fixed, the grass begins to disappear from overgrazing.  The private incentives (using the land for free) outweigh the social incentives (using it carefully).  Result: People can no longer raise sheep.

58. 57 The Tragedy of the Commons 共有资源的悲剧  The tragedy is due to an externality: Allowing one’s flock to graze on the common land reduces its quality for other families.  People neglect this external cost, resulting in overuse of the land.

59. 58 A C T I V E L E A R N I N G 2 : Policy options for common resources  What could the townspeople (or their government) have done to prevent the tragedy?  Try to think of two or three options. 58

60. 59 A C T I V E L E A R N I N G 2 : Answers  impose a corrective tax on the use of the land to “internalize the externality”  regulate use of the land (the “command-and- control” approach)  auction off permits allowing use of the land  divide the land, sell lots to individual families Each family will have incentive not to overgraze its own land. 59

61. 60 Policy Options to Prevent Overconsumption of Common Resources 如何阻止对公共资源的过度消费  regulate use of the resource  impose a corrective tax to internalize the externality example: hunting & fishing licenses, entrance fees for congested national parks  auction off permits allowing use of the resource example: spectrum auctions by the U.S. Federal Communications Commission  if the resource is land, convert to a private good by dividing and selling parcels to individuals

62. 61 Some Important Common Resources 一些重要的 公共资源  Clean air and water  Congested roads  Fish, whales, and other wildlife

63. 62 CASE STUDY: “You’ve Got Spam!”  Spam e-mail is a service some firms use to advertise their products.  Spam is not excludable: Firms cannot be prevented from spamming.  Spam is rival: As more companies use spam, it becomes less effective.  Thus, spam is a common resource.  Like most common resources, spam is overused – which is why we get so much of it! “Spam” email is named after everyone’s favorite delicacy.

64. 63 CONCLUSION  Public goods tend to be under-provided, while common resources tend to be over-consumed.  These problems arise because property rights are not well-established: Nobody owns the air, so no one can charge polluters. Result: too much pollution. Nobody can charge people who benefit from national defense. Result: too little defense.  The govt can potentially solve these problems with various policy options.

65. 64 CHAPTER SUMMARY  A good is excludable if someone can be prevented from using it. A good is rival in consumption if one person’s use reduces others’ ability to use the same unit of the good.  Markets work best for private goods, which are excludable and rival in consumption. Markets do not work well for other types of goods.

66. 65 CHAPTER SUMMARY  Public goods, such as national defense and fundamental knowledge, are neither excludable nor rival in consumption.  Because people do not have to pay to use them, they have an incentive to free ride, and firms have no incentive to provide them.  Therefore, the government provides public goods, using cost-benefit analysis to determine how much to provide.

67. 66 CHAPTER SUMMARY  Common resources are rival in consumption but not excludable. Examples include common grazing land, clean air, and congested roads.  People can use common resources without paying, so they tend to overuse them. Therefore, governments try to limit the use of common resources.