Intro to Food and Resource Economics - Week 9
Intro to Food and Resource Economics - Week 9 2713
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This 6 page Class Notes was uploaded by Taylor Baker on Tuesday October 11, 2016. The Class Notes belongs to 2713 at Mississippi State University taught by Danny Barefield in Fall 2016. Since its upload, it has received 5 views. For similar materials see Intro to Food & Resource Econ in agricultural economics at Mississippi State University.
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Date Created: 10/11/16
Intro to Food and Resource Economics Week 9 - October 10-12, 2016 (Fall Break Week) Chapter 10 - Externalities • What is an externality? • something that affects other people that they don't pay for (ex: education (Positive externality; big example), taxes, flu shot (positive), ) • Why do externalities make market outcomes inefficient? • What public policies aim to solve the problems of externalities? • How can people sometimes solve the problems of externalities on their own? Why do these types of private solutions not always work? Introduction: • Recall the 10 Principles from Chapter 1 ▪ Markets are usually a good way to organize economic activity. ▪ In the absence of market failures, the competitive market outcome is efficient and maximizes total surplus. • One type of market failure is an externality – the uncompensated impact of one person’s actions on the well-being of a bystander. • Externalities can be either positive or negative, depending on whether the impact to the bystander is beneficial or adverse. • Self-interested buyers and sellers neglect the external costs or benefits of their actions, so the market outcome is not efficient. • Another principle from Chapter 1: ▪ Governments can sometimes improve market outcomes. • In the presence of externalities, public policy can improve efficiency. Examples of Negative Externalities: • Air pollution from a factory • Late-night stereo blasting from the dorm room or apartment next to yours • Noise pollution from construction projects • Health risks to others from second-hand smoke • Talking or texting on a cell phone while driving makes the roads less safe for others Recap of welfare Economics: • The market equilibrium maximizes consumer surplus + producer surplus • The supply curve shows private cost; the cost directly incurred by sellers • The demand curve shows private value; the value to buyers (the prices they are willing to pay) - air pollution & carbon monoxide (negative externalities) into the atmosphere with putting gasoline into internal combustion engines Negative Externality Analysis: - Social cost = private cost + external cost - Supply (private Cost) - External cost: - = value of the negative impact on bystanders - = $1 per gallon (value of harm from smog, greenhouse gases etc.) With this externality, the socially optimal quantity is 20 gallons. At any Quantity less than 20 gallons, the value of additional gasoline exceeds social cost. - At any Quantity more than 20 gallons, the social cost of the last gallon is greater than its value to society. (Consumers value this product more than the environment) (we are incorporating a solution into the marketplace to deal with an externality— it wont get rid of the externality just deal with it) (this is a great example of how to explain your graphs on the test) How to reduce the quantity to be optimal - one way is to put a tax on it - Recognize that the market equilibrium (Q = 25) is greater than the social optimum (Q = 20) - One solution might be to tax gasoline sellers $1 per gallon; this would shift the supply curve up by $1 “Internalizing the Externality:” • Internalizing the externality – altering incentives so that people take account of the external effects of their actions • In the previous example, the $1 per gallon tax on sellers makes the sellers’ cost equal to the social costs • When market participants must pay social costs, then the market equilibrium equal the social optimum • Remember that imposing the tax on the buyers of gasoline would achieve the same outcome; the market quantity would equal the social optimum quantity - you would only out a tax on a negative externality to limit the quantity - the quantity will always shift to the left - going to put the tax on the producers because the tax is a cost like the supply curve Examples of Positive Externalities: • Being vaccinated agains contagious diseases protects not only you, but people who visit the salad bar or produce section after you • Research & Development creates knowledge that others can use • People going to college raise the population’s education level. This reduces crime and improves government. Positive Externalities: • In the presence of a positive externality, the social value of a good includes: ▪ Private value – the direct value to buyers (measured by the demand curve) ▪ External benefit – the value of the positive impact on bystanders • The socially optimal quantity maximizes welfare: ▪ At any lower quantity, the social value of additional units exceeds their cost ▪ At any higher quantity, the cost of the last unit exceeds its social value Positive Externality Analysis: - This is the market for flu shots when no externalities are recognized - Assume that the external benefit is $10 per shot - Draw the social value curve - Find the socially optimal Q - What policy would internalize this externality? - Recognize that the socially optimum quantity (Q = 25) is greater than the market equilibrium quantity (Q = 20) - To internalize the externality, use a subsidy of $10 per shot The arrow red arrow that shows the demand curve extending to the social value can also be called a subsidy Internalizing a positive externality analysis with a subsidy: - Old Consumer Surplus = A + C - New Consumer Surplus = A + C + F + G + H - Old Producer Surplus = F + I - New Producer Surplus = C + D + F + I - Cost of Subsidy = -(C + D + E + F + G + H) -Old Total Surplus = A + C + F + I -New Total Surplus = (A + C + F + G + H) + (C + D + F + I) - (C + D + E + F + E + G +H) = A + C + F + I – E -Dead Weight Loss = E (Remember that you should only look at the private demand curve, not the social value curve, when calculating the welfare)
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