Externalities.ppt

Public Policies Toward Externalities Objections to the economic analysis of pollution “We cannot give anyone the option of polluting for a fee.” - former Senator Edmund Muskie People face trade-offs Eliminating all pollution is impossible Clean water and clean air – opportunity cost Lower standard of living * Public Policies Toward Externalities Clean environment - is a normal good Positive income elasticity Rich countries can afford a cleaner environment More rigorous environmental protection Clean air and clean water - law of demand The lower the price of environmental protection The more the public will want Economic approach Pollution permits and corrective taxes Reduces the cost of environmental protection Increase demand for a clean environment * Private Solutions to Externalities The types of private solutions Moral codes and social sanctions Charities Self-interest of the relevant parties Integrating different types of businesses Interested parties – enter a contract * Private Solutions to Externalities The Coase theorem If private parties can bargain without cost over the allocation of resources They can solve the problem of externalities on their own Private economic actors Can solve the problem of externalities among themselves Whatever the initial distribution of rights Interested parties - reach a bargain: Everyone is better off Outcome is efficient * Private Solutions to Externalities Why private solutions do not always work High transaction costs Costs that parties incur in the process of agreeing to and following through on a bargain Bargaining simply breaks down Large number of interested parties * Chapter Table Figure APPENDIX Table Figure APPENDIX Externalities 10 Externalities Externality The uncompensated impact of one person’s actions on the well-being of a bystander Market failure Negative externality Impact on the bystander is adverse Positive externality Impact on the bystander is beneficial * Externalities Examples of negative exter