Presentation is loading. Please wait.

Presentation is loading. Please wait.

Externalities Externality—the behavior of one agent (person or firm) affects another agent in a way that is external to markets. negative externalities,

Similar presentations


Presentation on theme: "Externalities Externality—the behavior of one agent (person or firm) affects another agent in a way that is external to markets. negative externalities,"— Presentation transcript:

1 Externalities Externality—the behavior of one agent (person or firm) affects another agent in a way that is external to markets. negative externalities, e.g., chewing tobacco (disease and soiling), alcohol (drunk driving), road salt (car damage), and antibiotics (disease resistant bacteria). positive externalities, e.g., HPV vaccine (disease), and education (better citizens).

2 19th & Early 20th Century Chewing Tobacco
Mail Pouch paid barn owners $1 to $2 a year and painted the rest of the barn as well. Founded in 1879 The founders of Mail Pouch came up with the idea when they noticed that people liked chewing the clippings of stogie wrappers.

3 19th and Early 20th Century Chewing Tobacco
Quotes from Richard Kluger’s, Ashes to Ashes Chewing Tobacco: “splendidly suited” to 19th Century outdoor life In early 20th Century: Messy: spit aimed at “ubiquitous cuspidor(s)” hit “carpets, walls, draperies, and trousers. ” Dangerous: “spreader of tuberculosis and other contagions.”

4 Early 20th Century Courthouse
Cuspidor

5 Market for Chewing Tobacco (CT), 1900
Social Cost PCT S (private cost) external cost—the health and cleanup costs imposed on others from tobacco spit. PMKT D Q* QMKT QCT Efficient Q

6

7 The Market for Chewing Tobacco
Social Cost PCT For each pouch of chewing tobacco produced, the social cost includes the private costs of producing the chewing tobacco plus the cost to those bystanders adversely affected by the spit from that pouch. SMKT Social cost of producing Q’ D external cost Private cost of producing Q’ Q’ Q* QMKT QCT QMKT > Q* Market Failure: Negative externalities cause markets to produce a larger quantity than is efficient.

8 Correcting the Market Failure
Social Cost STax(T) PCT PCT SMKT S MKT PT external cost PMKT PMKT tax D D Q* QMKT QCT QT QNT QCT Changing incentives so people (or firms) take account of the external effects of their behaviors is called internalizing the externality. The government can internalize the externality by imposing a tax on chewing tobacco (assume that tobacco companies pay it). QT will equal Q* if the tax (per pouch) = the negative externality (per pouch).

9 Market for LoJack (LJ) S
(private cost) PLJ External benefit (the value of  in prob. that other cars will be stolen) DWL PMKT Social value D (private value) QMKT Q* QLJ Positive externalities cause markets to produce a smaller Q than is efficient.

10 Correcting the Market Failure
External benefit PLJ PLJ S Subsidy S Ss Social PMKT PMKT value PS D D QMKT Q* QLJ QLJ QMKT QS The government can internalize the externality by giving a subsidy to the producer of LoJack. QS will equal Q* if the subsidy (per LoJack) = the positive externality (per LoJack).

11 Correcting the Market Failure
Alteratively, economists Ayres and Nalebuff “urge regulators to require insurers to give discounts to LoJack users.” Suppose the government requires insurers to give discounts of $200 to people who purchase LoJack. External benefit PLJ PLJ S S $200 P’ Social PMKT PMKT value D’ D D QMKT Q* QLJ QLJ QMKT Q’


Download ppt "Externalities Externality—the behavior of one agent (person or firm) affects another agent in a way that is external to markets. negative externalities,"

Similar presentations


Ads by Google