SUMMARY CHAPTER 11 BOOK ECONOMICS N. Gregory Mankiw, Mark P. Taylor, Schemi e mappe concettuali di Economia Internazionale

Scarica SUMMARY CHAPTER 11 BOOK ECONOMICS N. Gregory Mankiw, Mark P. Taylor e più Schemi e mappe concettuali in PDF di Economia Internazionale solo su Docsity! CAP 11. EXTERNALITIES EXTERNALITIES An externality arises when a person engages in an activity that influences the well-being of a bystander (a third party) who neither pays nor receives any compensation for that effect. If the impact on the bystander is adverse, it is called a negative externality; if it is beneficial, it is called a positive externality. externality the cost or benefit of one person’s decision on the well-being of a bystander (a third party) which the decision maker does not take into account when making the decision negative externality the costs imposed on a third party of a decision positive externality the benefits to a third party of a decision The social Costs and social Benefits of decision-making Types of externalities The exhaust from cars is a negative externality because it creates smog that other people have to breathe. The government attempts to solve this problem by setting emission standards for cars. It may also tax petrol and vehicle ownership in order to reduce the amount that people drive. Research into new technologies provides a positive externality because it creates knowledge that other people can use. EXTERNALITIES AND MARKET INEFFICIENCY How externalities affect economic well-being. Welfare economics: a recap Figure 11.1 shows the supply and demand curves in the market for aluminium. Fig. 11.1 The market for aluminium The demand curve reflects the value to buyers, and the supply curve reflects the costs of sellers. The equilibrium quantity, QMARKET, maximizes the total value to buyers minus the total costs of sellers. In the absence of externalities, therefore, the market equilibrium is efficient. The demand curve for aluminium reflects the value of the benefits of aluminium to consumers, as measured by the prices they are willing to pay. At any given quantity, the height of the demand curve shows the willingness to pay of the marginal buyer. Similarly, the supply curve reflects the costs of producing aluminium. At any given quantity, the height of the supply curve shows the cost of the marginal seller – the cost to the producer of the last unit of aluminium sold. The demand and supply curves, therefore, reflect the private benefit to consumers and the private cost to suppliers. Negative externalities Now let’s suppose that for each unit of aluminium produced, a certain amount of a pollutant enters the atmosphere. This pollutant may pose a health risk for those who breathe the air, it is a negative externality. There is a cost involved in dealing with the effects of the pollutant which may be the health care that those affected have to receive. This cost is not taken into consideration by producers of aluminium who only consider the private costs of production. How does this externality affect the efficiency of the market outcome? Because of the externality, the cost to society of producing aluminium is larger than the cost to the aluminium producers. For each unit of aluminium produced, the social (or external) cost includes the private costs of the aluminium producers plus the costs to those bystanders affected adversely by the pollution. Figure 11.2 shows the social cost of producing aluminium. The Social Optimum or Socially Efficient Outcome At the market outcome (QMARKET) consumers value the benefits of consuming this quantity of aluminium at 0P. The true cost of Q is higher at P – the MARKET 1 marginal consumer values aluminium at less than the social cost of producing it. The vertical distance P,P1 represents the welfare loss of producing QMARKET. This is equal to the social cost of producing that output. Fig. 11.2 Pollution and the Social Optimum In the presence of a negative externality, such as pollution, the social cost of the good exceeds the private cost. The optimal quantity or socially efficient outcome, QOPTIMUM , is therefore smaller than the equilibrium quantity, QMARKET . To rectify the inefficiency, some way of forcing the decision maker to take into consideration some or all of the social costs has to be put in place. In our example, one way to do this would be to tax aluminium producers for each tonne of aluminium sold. The use of such a tax is called internalizing an externality because it gives buyers and sellers in the market an incentive to take account of the external effects of their actions. internalizing an externality altering incentives so that people take account of the external effects of their actions Positive externalities Consider education. Education yields positive externalities because a more educated population leads to improved productivity and increases the potential for economic growth, which can benefit everyone. The analysis of positive externalities is similar to the analysis of negative externalities. As Figure 11.3 shows, the demand curve does not reflect the value to society of the good. The value placed on an activity such as education is valued less by consumers than the total value to society. At the equilibrium market allocation of QMARKET the value of the private benefits to individuals of education is P but the value to society as a whole is P1. The vertical distance between P and P1 is the value of the social benefits to society. Because the social value (or external benefit) is greater than the private value, the social value curve, or marginal social benefit (MSB) curve, lies above the demand curve. The MSB is the private value plus the external benefit to society at each price. At every price the benefit to society is greater than the private benefit, hence the social value curve lies to the right of the private benefit curve.The optimal quan- tity is found where the social value curve and the supply curve (which represents costs) intersect at a price of P2. Hence, the socially optimal quantity is greater than the quantity determined by the private market and the price is higher than the private equilibrium price. This implies that the value of education is under- priced at market equilibrium. The welfare loss associated with the private market outcome at QMARKET is shown by the shaded triangle. Fig. 11.3 Education and the social optimum In the presence of a positive externality, the social value of the good exceeds the private value. The optimal quantity, QOPTIMUM , is therefore larger than the equilibrium quantity, QMARKET . Positional externalities Positional goods have the characteristic that the utility from consumption of a good is dependent on how it compares with others in the same class. For example, some cars are considered to be better quality or confer higher esteem than others. Purchases or decisions which alter the context of the evaluation by an individual of the positional good can generate a positional externality. positional externality purchases or decisions which alter the context of the evaluation by an individual of the positional good The existence of positional externalities which leads to individuals investing in a series of measures designed to gain them an advantage but which simply offset each other is referred to as positional arms races. positional arms race a situation where individuals invest in a series of measures designed to gain them an advantage but which simply offset each other PRIVATE SOLUTIONS TO EXTERNALITIES Private actors and public policymakers respond to externalities in various ways. The Types of Private solution