EMI3- Externalities Flashcards
(32 cards)
When does the problems of externalities arise?
The problem of externalities arises where there exists an untraded or unpriced good or service such that an excess demand or supply arises – that is the market fails to clear – and the outcome is not Pareto Efficient.
What necessary assumption which is an essential condition for a Pareto efficient outcome does the existence of externalities violate?
The existence of externalities violates the assumption of well-defined property rights
List 4 possible solutions for externalities?
- Permits,
- Allocation of property rights,
- (Pigouvian) taxes
- Standards.
What are the 3 main types of externality?
- Network Externality
- Consumer Externality
- Production Externality
- What are Network Externalities characterised by?
- What does this mean?
- Give 2 examples
- How do we write out the marginal benefit to the consumer of using the good?
- The Bandwagon Effect
- The marginal value of the good to a consumer increases with increases in the number of others that use the good
- Examples include fax machines and social media networks. Examples include fax machines and social media networks.
- Marginal Benefit = f(n)
What is the critical mass?
The point where the Marginal Benefit is greater than the cost of obtaining the good. Eg only getting a phone when 20 of your friends also have one.
What is the shape of the graph in (n,MB) space?
Concave (ie diminishing marginal benefit)
What kind of externality is smoking?
Smoking is a consumption externality
Suppose there are no property rights in the smoking scenario, what could then happen?
The non-smoker could try and bribe the smoker to reduce their smoking, but the smoker could just accept the money and continue smoking as normal. Or the smoker could reduce their consumption and then the non-smoker could refuse to pay.
Therefore, with no property rights, what is the realistic outcome?
The smoker will smoke as much as they like.
What do property rights give us?
An enforceable market
What happens if the smoker gets given property rights?
The market will start off with maximum smoking, but the non-smoker will be able to pay them to reduce their smoking until both individuals indifference curves are tangential to each other, at the Pareto efficient outcome.
Does resolving market failure mean eliminating smoking?
No
What happens if the non-smoker gets given property rights?
The market will start off with minimum smoking, but the smoker will be able to pay them to increase their smoking until both individuals indifference curves are tangential to each other, at the Pareto efficient outcome.
What is the Coase Theorem?
• If through the allocation of property rights a market can be created for the externality then an efficient outcome will result regardless of who is given the property rights.
- How do many of the problems with Coase Theorem come about?
* Explain
- Transaction costs
- Transactions costs of allocating and enforcing property rights are going to be higher as the number of agents involved in the market increases and as the subject of the property rights becomes harder to observe/measure.
What kind of externality is pollution?
Pollution is a production externality
How do we resolve the Pollution externality?
We introduce a per unit tax t, (otherwise known as a Pigouvian tax) to make MPB=MPC=MSC
- Who introduced the idea of Tragedy of the Commons?
- What does the idea refer to?
- Give a real world example
- Hardin 1968
- If multiple agents have access rights to a common resource, over-dissipation of the resource will happen.
- Overfishing
- Why does the tragedy of the commons occur?
* What does this say about the market
- Because individuals optimise their behaviour for their own personal gain, but this has negative externalities
- The market fails to efficiently allocate the resource. Effectively the price of using the commons is too low and the quantity too high.
What is a possible solution to the tragedy of the commons?
Establish a single agent who controls the commons, a monopoly, and assign them alone the access rights. The single owner of the access rights then maximises their rent by restricting the usage by other agents (setting the monopoly price for access) and maximising the value of the resource.
- Who introduced the idea of Tragedy of the Anticommons?
- What does the idea refer to?
- Give a real world example
- Heller 1998
- Multiple agents having exclusion rights
- A nightclub needing 3 tickets to enter, if each seller maximises their profit, the total price will be too high for people to go,
- Why does the tragedy of the anticommons occur?
* What does this say about the market
- Because individuals optimise their behaviour for their own personal gain, but this has negative externalities
- The market fails to efficiently allocate the resource. Effectively the price of using the commons is too high and the quantity too low.
What is a possible solution to the tragedy of the anticommons?
One solution to the anti-commons problem is to establish a single agent who controls the commons, a monopoly, and assign them alone the exclusion rights. The single owner of the exclusion rights then maximises their rent setting the monopoly price for and maximising the value of the resource.
