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15. Principles of Economics (Brief Edition)_2e (9)

Chapter 9: Externalities and. Property Rights.1. Define negative and positive externalities and. analyze their effect on resource allocations.2. Discuss and explain the Coase Theorem.3. Explain how the effects of externalities can be. remedied.4. Discuss why the optimal amount of an externality is. almost never zero.5. Illustrate the tragedy of the commons and show. how private ownership is a way of preventing it.6. Define positional externalities and their effects, and. show how they can be remedied. McGraw­Hill/Irwin Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved.External Costs and Benefits.• An external cost is a cost of an activity that falls on. people other than those who pursue the activity. – Also called a negative externality.• An externality is the name given to an external cost or. external benefit of an activity.• An external benefit is a benefit of an activity received by. people other than those who pursue the activity. – Also called a positive externalityExternalities Affect Resource Allocation.• Externalities reduce economic efficiency. – Solutions to externalities may be efficient. – When efficient solutions to externalities are not possible,. government intervention or other collective action may be. used. 9­2 Remedying Externalities.• With externalities, private market outcomes do. not achieve the largest possible economic. surplus. – Cash is left on the table.• For example, with monopolies, output is lower. than with prefect competition. – Introduction of coupons and rebates expands the. market.• With externalities, actions to capture the surplus. are likely. 9­3 The Coase Theorem.• The Coase Theorem says that if people can. negotiate the right to perform activities that cause. externalities, they can always arrive at efficient. solutions to problems caused by externalities. – Negotiations must be costless.• Sometimes those harmed pay to stop pollution. – Fitch pays Abercrombie.• Sometimes polluter buys the right to pollute. – Abercrombie pays Fitch.• The adjustment to the externality is usually done by. the party with the lowest cost. 9­4Legal Remedies for Externalities.• If negotiation is costless, the party with the lowest cost. usually makes the adjustment. – Private solution is generally adequate.• When negotiation is not costless laws may be used to. correct for externalities. – The burden of the law can be placed on those who have the. lowest costExamples of Legal Remedies for Externalities.• Noise regulations (cars, parties, honking horns).• Most traffic and traffic-related laws.• Zoning laws.• Building height and footprint regulations (sunshine laws).• Air and water pollution laws. 9­5Optimal Amount of Negative. Externalities. MC & MB. MC MC = MB Optimal amount. of pollution MB Q. Quantity of Pollution 9­6 Tragedy of Commons.• When use of a communally owned resource has. no price, the costs of using it are not considered. – Use of the property will increase until MB = 0. – This is known as the tragedy of the commons.• Suppose 5 villagers own land suitable for grazing. – Each can spend $100 for either a steer or a. government bond that pays 13%. – Villagers know what everyone before them has done. – Steer graze on the commons. – Value of the steer in year 2 depends on herd size. 9­7The Effect of Private Ownership.• The villagers