Professional Documents
Culture Documents
1
OUTLINE
Chapter 5
5.5 Conclusion
2
EXTERNALITIES: PROBLEMS AND SOLUTIONS
3
EXTERNALITY THEORY: ECONOMICS OF
NEGATIVE PRODUCTION EXTERNALITIES
Example: steel plant pollutes a river but plant does not face
any pollution regulation (and hence ignores pollution when
deciding how much to produce)
4
5.1
Externality Theory
Economics of Negative Production Externalities
Chapter 5 Externalities: Problems and Solutions
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 6 of 33
EXTERNALITY THEORY: ECONOMICS OF
NEGATIVE CONSUMPTION EXTERNALITIES
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 10 of 33
A P P L I C A T I O N
Chapter 5 Externalities: Problems and Solutions
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 11 of 33
EXTERNALITY THEORY: POSITIVE
EXTERNALITIES
8
5.1
Externality Theory
Positive Externalities
Chapter 5 Externalities: Problems and Solutions
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 13 of 33
EXTERNALITY THEORY: MARKET OUTCOME IS
INEFFICIENT
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PRIVATE-SECTOR SOLUTIONS TO NEGATIVE
EXTERNALITIES: COASE THEOREM
13
COASE THEOREM EXAMPLE
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 16 of 33
THE PROBLEMS WITH COASIAN SOLUTIONS
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THE PROBLEMS WITH COASIAN SOLUTIONS:
BOTTOM LINE
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PUBLIC SECTOR REMEDIES FOR
EXTERNALITIES
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5.3
Public-Sector Remedies for Externalities
Corrective Taxation
Chapter 5 Externalities: Problems and Solutions
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 22 of 33
5.3
Public-Sector Remedies for Externalities
Subsidies
Chapter 5 Externalities: Problems and Solutions
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 24 of 33
PUBLIC SECTOR REMEDIES FOR
EXTERNALITIES: REGULATION
22
5.4
Distinctions Between Price and Quantity
Approaches to Addressing Externalities
Chapter 5 Externalities: Problems and Solutions
Basic Model
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 26 of 33
MODEL WITH HETEROGENEOUS COSTS
V = max q H + q L cH (q H ) cL(q L)
qH ,qL
M CH = 1, M CL = 1 q H = 1/3, q L = 2/3
Optimum outcome is to have the low cost firm do more pol-
lution reduction than the high cost firm
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TAX VERSUS REGULATION SOLUTION
25
Quantity Regulation with Trading Permits
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 27 of 33
MULTIPLE PLANTS WITH DIFFERENT
REDUCTION COSTS
28
CORRECTIVE TAXES VS. TRADABLE PERMITS
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 29 of 33
5.4
Distinctions Between Price and Quantity
Approaches to Addressing Externalities
Chapter 5 Externalities: Problems and Solutions
2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 30 of 33
CONCLUSION