Externalities, Pollution and Global Warming
Topic 4: Externalities, Pollution and Global Warming
ECON 1210B Economics and Society
1
Introduction
Recall: Markets are usually a good way to organize economic activity In the absence of market failures, the market outcome is efficient, maximizes total surplus One major type of market failure: externalities Externality: the uncompensated impact of one person’s actions on the well-being of a bystander 2
Externalities and Efficiency
In the presence of externality, market equilibrium is no longer efficient Individual’s estimates of resources value (or cost) are not correct (from the society’s point of view) Traditional belief: Government to step in to ensure efficient resource allocation And to protect the interest of bystanders as well 3
Negative Externality
Negative Externality: the effect on bystanders is adverse Example: the neighbor’s barking dog talking on cell phone while driving makes the roads less safe for others health risk to others from second-hand smoke noise pollution from construction projects 4
Pollution: A Negative Externality
Firms burn huge quantities of fossil fuels (coal, natural gas, oil) that cause acid rain and global warming Firms dump toxic waste into rivers, lakes, and oceans These environmental issues are simultaneously everybody’s problem and nobody’s problem 5
Pollution: A Negative Externality
Example of negative externality: Air pollution from factory Firm does not bear the full cost of its production, so will produce more than the socially efficient quantity How govt may improve the market outcome: Impose a corrective tax on the firm equal to the external cost of the pollution it generates 6
Recap of Welfare Economics
P $5
4 3 $2.50 2 1 0
The market for gasoline
The market eqm maximizes consumer + producer surplus. Supply curve shows private cost, the costs directly incurred by sellers Demand curve shows private value, the value to buyers (the prices they are willing to pay)
0
10
20 25
ECON 1210B Economics and Society
1
Introduction
Recall: Markets are usually a good way to organize economic activity In the absence of market failures, the market outcome is efficient, maximizes total surplus One major type of market failure: externalities Externality: the uncompensated impact of one person’s actions on the well-being of a bystander 2
Externalities and Efficiency
In the presence of externality, market equilibrium is no longer efficient Individual’s estimates of resources value (or cost) are not correct (from the society’s point of view) Traditional belief: Government to step in to ensure efficient resource allocation And to protect the interest of bystanders as well 3
Negative Externality
Negative Externality: the effect on bystanders is adverse Example: the neighbor’s barking dog talking on cell phone while driving makes the roads less safe for others health risk to others from second-hand smoke noise pollution from construction projects 4
Pollution: A Negative Externality
Firms burn huge quantities of fossil fuels (coal, natural gas, oil) that cause acid rain and global warming Firms dump toxic waste into rivers, lakes, and oceans These environmental issues are simultaneously everybody’s problem and nobody’s problem 5
Pollution: A Negative Externality
Example of negative externality: Air pollution from factory Firm does not bear the full cost of its production, so will produce more than the socially efficient quantity How govt may improve the market outcome: Impose a corrective tax on the firm equal to the external cost of the pollution it generates 6
Recap of Welfare Economics
P $5
4 3 $2.50 2 1 0
The market for gasoline
The market eqm maximizes consumer + producer surplus. Supply curve shows private cost, the costs directly incurred by sellers Demand curve shows private value, the value to buyers (the prices they are willing to pay)
0
10
20 25