Microeconomics Externalities, Market Power Assignment

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Introductory* Micro*economics
*Sem 1*,2010
Assignment 2:
Genevieve Blanch
Externalities in this situation exist where the Government, Country or Private Organisation decides to launch a new satellite causing costs and benefits to other members of society which do not impact on the G,C or PO. Such externalities include:

NEGATIVE (Costs to other members of society)
Hazard to the useful working satellites that surround Earth. Threat to our dependence for communications, broadcasting and surveillance. Debris from one collision causing a second, which creates still more debris and collisions. A socially optimal outcomes occurs when then the social maximal benefit equals social marginal cost meaning the surplus to society is maximized. At the same time efficient market equilibrium is needed where the private marginal benefit (PMB) equals Private marginal cost (PMC). {draw:line} {draw:line} {draw:line} SMC=PMC

{draw:line} SMB=PMB
For each active satellite a certain amount of debris is released into space. Because the debris is a hazard to other working satellites it is considered a negative externality. Due to this negative externality in production, the social cost (SMC) of producing active satellites exceeds the private cost (PMC). This means the socially desirable number of active satellites, Q optimum, is smaller than the equilibrium quantity Q* (As seen below). Graph: Debris and the social optimum

{draw:line} * {draw:line} * SMC
{draw:line} {draw:line} * *Price of satellites.
{draw:line} (Demand) PMC
* {draw:line} {draw:line} * Optimum
(Supply) PMB=SMB
Q optimum* *Q * * *Q=No. of satellites launched
We could conclude from the article that the socially optimal outcome is not being achieved due to the negative externalities. b)
The article suggests as solution*s* to achieve socially optimal amou*nt of space debris* to: Create “International civil satellite-awareness system”. “Countries should comply with international guidelines to minimize the amount of debris created by launches” A moratorium on debris-creating anti-satellite tests

Satellite launchers buying insurance.
By agreeing to the policies the main aim would be to ‘internalize the externality’. Meaning the satellite producers taking into account the social costs and benefits of their decisions. The first policy would work by increasing the awareness of the problem of debris in space and therefore giving an incentive for producers to think twice on a moral level before producing the satellites. If this worked the PMC would decrease in quantity to meet the optimum at SMC. The second policy would work by governments implementing a tax which will equate PMC and SMC. By putting a tax on a certain amount of debris released through launches the SMC is forced to meet PMC, and has low cost to society. This tax should give producers of active satellites and the launches an economic incentive to reduce the amount of debris being released into space. Another option from the second policy would be to regulate the quantity of satellites being launched or to regulate the quantity of debris being released. This could involve the government telling the producers of satellites to reduce the quantity of satellites launches or debris being released. The third policy would work by the government placing a ban on all anti-satellite tests which are heavy releasers of debris. Banning one type of satellite would reduce the overall amount of satellites launched causing the PMC to approach the social optimum. The fourth policy would works by the insurance acting like a tax. Buying insurance acts like a tax that will increase PMC to social optimum. . c)

The free rider problem:
The free rider problem in the article is where the ‘orbit is open to anyone with a...
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