tailieunhanh - Lecture Principles of microeconomics - Chapter 11: Externalities and property rights

This chapter introduces you to the third party effect of external costs and external benefits. You will learn that externalities cause an inefficient allocation of resources, but with negotiation between the affected parties solutions can be devised to correct the misallocation. | Externalities and Property Rights Slide 11 - What is Chapter 11 about? Slide 11 - I. External Costs and Benefits Slide 11 - Externalities External cost A cost that falls on people other than those who pursue the activity Aka negative externality External benefit A benefit received by people other than those who pursue the activity Aka positive externality Note: an externality is an impact on others which is NOT reflected in prices Slide 11 - Externalities and the Invisible Hand The ‘invisible hand’ model assumes conditions of perfect competition where externalities do not exist With externalities present: Free markets cannot necessarily be expected to produce socially efficient outcome Example: Bee-keeper and orchards Slide 11 - Externalities and Resource Allocation Individuals considering only their own costs and benefits will tend to engage Too much in activities that generate Negative externalities Market Price will overestimate benefit of activity Too little | Externalities and Property Rights Slide 11 - What is Chapter 11 about? Slide 11 - I. External Costs and Benefits Slide 11 - Externalities External cost A cost that falls on people other than those who pursue the activity Aka negative externality External benefit A benefit received by people other than those who pursue the activity Aka positive externality Note: an externality is an impact on others which is NOT reflected in prices Slide 11 - Externalities and the Invisible Hand The ‘invisible hand’ model assumes conditions of perfect competition where externalities do not exist With externalities present: Free markets cannot necessarily be expected to produce socially efficient outcome Example: Bee-keeper and orchards Slide 11 - Externalities and Resource Allocation Individuals considering only their own costs and benefits will tend to engage Too much in activities that generate Negative externalities Market Price will overestimate benefit of activity Too little in activities that generate Positive externalities Market Price will underestimate benefit of activity Slide 11 - Fig. How External Costs and Benefits Affect Resource Allocation Slide 11 - Coase Theorem Coase Theorem If there is no negotiation cost, people can negotiate the purchase and sale of the right to perform activities that cause externalities Individual negotiation (if costless) gives efficient solutions to the problems caused by externalities The efficient solution does not depend upon who has the property right The distribution of benefits and costs does depend upon who has the property right Slide 11 - Table Costs and Benefits of Eliminating Toxic Waste Slide 11 - Legal Remedies for Externalities Negotiation is not always practical . pollution by cars In practice, many laws and regulations try to solve externality problems The burden of adjustment is often placed on those who can adjust at the lowest cost Slide 11 - Optimal Amount of .