Externalities（2003版）.ppt

Externalities Chapter 5 Contents Externalities Externality—when the activity of one entity directly affects the welfare of another in a way that is outside the market mechanism, the effect is called an externality. In this chapter, we analyze these inefficiencies and possible remedies from them. one of the most important applications of externality theory is the debate over environmental quality, and much of the discussion focuses on this issue. The nature of externalities Externalities is a consequence of the failure or inability to establish property rights. suppose Lisa or Bart owned the river, there is no externality. Graphical Analysis 1.An externality problem (figure 5.1) From private’s point of view, he produces all levers of output for which MB exceeds MPC ,the quantity is Qp (MPC=MB). From society’s point of view, the quantity is Qs,( MPC+MD=MSC) Gains and losses from moving to an efficient level of output From Qp to Qs, A. Lisa gains area abfe = cdhg ,(the distance between MSC and MPC is MD) B. Bart loses areas is dcg( the distance between MB and MPC) C.Social net gains is dhg (cdhg-dcg) Conclusion：externality causes inefficient problems。 More details 1,They can be produced by consumers as well as firms. (factory、cigar) 2,Externalities are reciprocal in nature .(Bart is polluter，Lisa is polluter as well ) 3,Externalities can be positive. (vaccination) 4,public goods can be views as special kind of externality. (when an individual creates a positive externality with full effects felt by every person in the economy, the externalities is a pure public good). The private responses The private responses 1.Bargaining :In the presence of externalities, an inefficient allocation of resources emerges if nothing is done about it. The root cause of the inefficiencies associated with externalities is the absence of property right. when property rights are assigned, individuals may respond to the externality by bargaining with each other.