范英文第33章講義

1、Chapter Thirty-ThreeExternalitiesWhat do we do in this chapterWe study a very important concept that is relevant to both welfare economics and equilibrium analysisExternalitiesAn externality is a cost or a benefit imposed upon someone by actions taken by others. The cost or benefit is thus generated

2、 externally to that somebody.An externally imposed benefit is a positive externality.An externally imposed cost is a negative externality.Examples of Negative ExternalitiesAir pollution.Traffic congestion.Second-hand cigarette smoke.Examples of Positive ExternalitiesA well-maintained property next d

3、oor that raises the market value of your property.Improved driving habits that reduce accident risks.A scientific advance.Externalities and EfficiencyCrucially, an externality impacts a third party; i.e. somebody who is not a participant in the activity that produces the external cost or benefit.Ine

4、fficiency & Negative ExternalitiesConsider two agents, A and B, and two commodities, money and smoke.Both smoke and money are goods for Agent A.Money is a good and smoke is a bad for Agent B.Smoke is a purely public commodity.Inefficiency & Negative ExternalitiesAgent A is endowed with $yA.Agent B i

5、s endowed with $yB.Smoke intensity is measured on a scale from 0 (no smoke) to 1 (maximum concentration).Inefficiency & Negative ExternalitiesOA10SmokemAyAMoney and smoke areboth goods for Agent A.BetterInefficiency & Negative ExternalitiesOB10SmokemByBMoney is a good and smokeis a bad for Agent B.B

6、etterInefficiency & Negative ExternalitiesOB10SmokemByBMoney is a good and smokeis a bad for Agent B.BetterInefficiency & Negative ExternalitiesWhat are the efficient allocations of smoke and money?Inefficiency & Negative ExternalitiesOA10SmokemAOB10SmokemByAyBInefficiency & Negative ExternalitiesOA

7、10SmokemAOB10SmokemByAyBEfficientallocationsInefficiency & Negative ExternalitiesSuppose there is no means by which money can be exchanged for changes in smoke level.What then is Agent As most preferred allocation?Is this allocation efficient?Inefficiency & Negative ExternalitiesOA10SmokemAOB10Smoke

8、mByAyBEfficientallocations As mostpreferred choiceis inefficientInefficiency & Negative ExternalitiesContinue to suppose there is no means by which money can be exchanged for changes in smoke level.What is Agent Bs most preferred allocation?Is this allocation efficient?Inefficiency & Negative Extern

9、alitiesOA10SmokemAOB10SmokemByAyBEfficientallocations Bs mostpreferred choiceis inefficientInefficiency & Negative ExternalitiesSo if A and B cannot trade money for changes in smoke intensity, then the e is inefficient.Either there is too much smoke (As most preferred choice) or there is too little

10、smoke (Bs choice).Externalities and Property RightsRonald Coases insight is that most externality problems are due to an inadequate specification of property rights and, consequently, an absence of markets in which trade can be used to internalize external costs or benefits.Externalities and Propert

11、y RightsCausing a producer of an externality to bear the full external cost or to enjoy the full external benefit is called internalizing the externality.Externalities and Property RightsNeither Agent A nor Agent B owns the air in their room.What happens if this property right is created and is assi

12、gned to one of them?Externalities and Property RightsSuppose Agent B is assigned ownership of the air in the room.Agent B can now sell “rights to smoke”.Will there be any smoking?If so, how much smoking and what will be the price for this amount of smoke?Externalities and Property RightsLet p(sA) be

13、 the price paid by Agent A to Agent B in order to create a smoke intensity of sA.Externalities and Property RightsOA10SmokemAOB10SmokemByAyBExternalities and Property RightsOA10SmokemAOB10SmokemByAyBp(sA)Both agentsgain andthere is apositiveamount ofsmoking.sAExternalities and Property RightsOA10Smo

14、kemAOB10SmokemByAyBp(sA)sAEstablishinga market fortrading rightsto smoke causes an efficientallocation tobe achieved.Externalities and Property RightsSuppose instead that Agent A is assigned the ownership of the air in the room.Agent B can now pay Agent A to reduce the smoke intensity.How much smoki

15、ng will there be?How much money will Agent B pay to Agent A?Externalities and Property RightsOA10SmokemAOB10SmokemByAyBExternalities and Property RightsOA10SmokemAOB10SmokemByAyBp(sB)Both agentsgain andthere is areducedamount ofsmoking.sBExternalities and Property RightsOA10SmokemAOB10SmokemByAyBp(s

16、B)Establishinga market fortrading rightsto reducesmoke causes an efficientallocation tobe achieved.sBExternalities and Property RightsNotice that theagent given the property right (asset) is better off than at her own most preferred allocation in the absence of the property right.amount of smoking t

17、hat occurs in equilibrium depends upon which agent is assigned the property right.Externalities and Property RightsOA10SmokemAOB10SmokemByAyBp(sB)p(sA)sA sBsBsAExternalities and Property RightsIs there a case in which the same amount of smoking occurs in equilibrium no matter which agent is assigned

18、 ownership of the air in the room?Externalities and Property RightsOA10SmokemAOB10SmokemByAyBp(sB)p(sA)sA = sBExternalities and Property RightsOA10SmokeOB10SmokeyAyBp(sB)p(sA)sA = sBSo, for both agents, preferences must bequasilinear in money; U(m,s) = m + f(s).Coases TheoremCoases Theorem is: If al

19、l agents preferences are quasilinear in money, then the efficient level of the externality generating commodity is produced no matter which agent is assigned the property right.Production ExternalitiesA steel mill produces jointly steel and pollution.The pollution adversely affects a nearby fishery.

20、Both firms are price-takers.pS is the market price of steel.pF is the market price of fish.Production ExternalitiescS(s,x) is the steel firms cost of producing s units of steel jointly with x units of pollution.If the steel firm does not face any of the external costs of its pollution production the

21、n its profit function is and the firms problem is toProduction ExternalitiesThe first-order profit-maximizationconditions areandProduction Externalitiesstates that the steel firmshould produce the output level of steelfor which price = marginal production cost.Production Externalitiesstates that the

22、 steel firmshould produce the output level of steelfor which price = marginal production cost.is the rate at which the firmsinternal production cost goes down as thepollution level risesProduction Externalitiesstates that the steel firmshould produce the output level of steelfor which price = margin

23、al production cost.is the rate at which the firmsinternal production cost goes down as thepollution level rises, sois the marginal cost to thefirm of pollution reduction.Production Externalitiesis the marginal cost to thefirm of pollution reduction.What is the marginal benefit to the steelfirm from

24、reducing pollution?Production Externalitiesis the marginal cost to thefirm of pollution reduction.What is the marginal benefit to the steelfirm from reducing pollution?Zero, since the firm does not face itsexternal cost.Hence the steel firm chooses the pollutionlevel for whichProduction Externalitie

25、sand the first-order profit-maximizationconditions areandE.g. suppose cS(s,x) = s2 + (x - 4)2 andpS = 12. ThenProduction Externalitiesdetermines the profit-max.output level of steel; s* = 6.Production Externalitiesdetermines the profit-max.output level of steel; s* = 6.is the marginal cost to the fi

26、rmfrom pollution reduction. Since it getsno benefit from this it sets x* = 4. Production Externalitiesdetermines the profit-max.output level of steel; s* = 6.is the marginal cost to the firmfrom pollution reduction. Since it getsno benefit from this it sets x* = 4. The steel firms maximum profit lev

27、el isthusProduction ExternalitiesThe cost to the fishery of catching f units of fish when the steel mill emits x units of pollution is cF(f,x). Given f, cF(f,x) increases with x; i.e. the steel firm inflicts a negative externality on the fishery.Production ExternalitiesThe cost to the fishery of cat

28、ching f units of fish when the steel mill emits x units of pollution is cF(f,x). Given f, cF(f,x) increases with x; i.e. the steel firm inflicts a negative externality on the fishery.The fisherys profit function isso the fisherys problem is toProduction ExternalitiesThe first-order profit-maximizati

29、oncondition isProduction ExternalitiesThe first-order profit-maximizationcondition isHigher pollution raises the fisherysmarginal production cost and lowers bothits output level and its profit. This is theexternal cost of the pollution.Production ExternalitiesE.g. suppose cF(f;x) = f2 + xf and pF =

30、10.The external cost inflicted on the fisheryby the steel firm is xf. Since the fisheryhas no control over x it must take the steelfirms choice of x as a given. The fisherysprofit function is thusProduction ExternalitiesGiven x, the first-order profit-maximizationcondition isSo, given a pollution le

31、vel x inflicted uponit, the fisherys profit-maximizing outputlevel isProduction ExternalitiesGiven x, the first-order profit-maximizationcondition isSo, given a pollution level x inflicted uponit, the fisherys profit-maximizing outputlevel isNotice that the fishery produces less, andearns less profi

32、t, as the steel firmspollution level increases.Production Externalities The steel firm, ignoring its external cost inflicted upon the fishery,chooses x* = 4, so the fisherysprofit-maximizing output level given thesteel firms choice of pollution level isf* = 3, giving the fishery a maximumprofit leve

33、l ofNotice that the external cost is $12.Production ExternalitiesAre these choices by the two firms efficient?When the steel firm ignores the external costs of its choices, the sum of the two firms profits is $36 + $9 = $45.Is $45 the largest possible total profit that can be achieved?Merger and Int

34、ernalizationSuppose the two firms merge to e one. What is the highest profit this new firm can achieve?Merger and InternalizationSuppose the two firms merge to e one. What is the highest profit this new firm can achieve?What choices of s, f and x maximize the new firms profit?Merger and Internalizat

35、ionThe first-order profit-maximizationconditions areThe solution isMerger and InternalizationAnd the merged firms maximum profitlevel isThis exceeds $45, the sum of the non-merged firms.Merger and InternalizationMerger has improved efficiency.On its own, the steel firm produced x* = 4 units of pollu

36、tion.Within the merged firm, pollution production is only xm = 2 units.So merger has caused both an improvement in efficiency and less pollution production. Why?Merger and InternalizationThe steel firms profit function is so the marginal cost of producing x unitsof pollution isWhen it does not have

37、to face theexternal costs of its pollution, the steelfirm increases pollution until this marginalcost is zero; hence x* = 4.Merger and InternalizationIn the merged firm the profit function isThe marginal cost of pollution is thusMerger and InternalizationIn the merged firm the profit function isThe

38、marginal cost of pollution isMerger and InternalizationIn the merged firm the profit function isThe marginal cost of pollution isThe merged firms marginal pollution costis larger because it faces the full cost ofits own pollution through increased costsof production in the fishery, so lesspollution

39、is produced by the merged firm.Merger and InternalizationBut why is the merged firms pollution level of xm = 2 efficient?The external cost inflicted on the fishery is xf, so the marginal external pollution cost isThe steel firms cost of reducing pollution is Efficiency requiresMerger and Internaliza

40、tionMerger therefore internalizes an externality and induces economic efficiency.How else might internalization be caused so that efficiency can be achieved?Coase and Production ExternalitiesCoase argues that the externality exists because neither the steel firm nor the fishery owns the water being

41、polluted.Suppose the property right to the water is created and assigned to one of the firms. Does this induce efficiency?Coase and Production ExternalitiesSuppose the fishery owns the water.Then it can sell pollution rights, in a competitive market, at $px each.The fisherys profit function esCoase

42、and Production ExternalitiesSuppose the fishery owns the water.Then it can sell pollution rights, in a competitive market, at $px each.The fisherys profit function esGiven pf and px, how many fish and how many rights does the fishery wish to produce? (Notice that x is now a choice variable for the f

43、ishery.)Coase and Production ExternalitiesThe profit-maximum conditions areCoase and Production ExternalitiesThe profit-maximum conditions areand these give(fish supply)(pollutionright supply)Coase and Production ExternalitiesThe steel firm must buy one right for every unit of pollution it emits so

44、its profit function esGiven pf and px, how much steel does the steel firm want to produce and how many rights does it wish to buy?Coase and Production ExternalitiesThe profit-maximum conditions areCoase and Production ExternalitiesThe profit-maximum conditions areand these give(steel supply)(polluti

45、onright demand)Coase and Production ExternalitiesIn a competitive market for pollution rightsthe price px must adjust to clear the marketso, at equilibrium,Coase and Production ExternalitiesIn a competitive market for pollution rightsthe price px must adjust to clear the marketso, at equilibrium,The

46、 market-clearing price for pollutionrights is thusCoase and Production ExternalitiesIn a competitive market for pollution rightsthe price px must adjust to clear the marketso, at equilibrium,The market-clearing price for pollutionrights is thusand the equilibrium quantity of rightstraded isCoase and Production ExternalitiesCoase and Production ExternalitiesSo if ps = 12 and pf = 10 thenThis is the efficient e.Coase and Production Ext