Lecture 8: externalities Denition: a positive benet externality is an unintended negative harm experienced by someone who is not a party to the

e action or transaction. Spillover eect is another name for positive or negative externalities.

Benets and harm can be quite subjective: wind chimes, train noise. Negative externalities Wide range of negative externalities from trivial to very serious: 1. Bumping someone in the hall. Solution: conventions of courtesy. Excuse me. 2. Cell phone going o in a theater. Solution: the owner of the theater a rules against cellphone use during the movie. Ticket buyers acquire a limited set of privileges which dont include cellphone use. 3. Disturbing your neighbors with loud music. Possible solution: negotiate with the neighbor. Reach an agreement where they play the music only during certain hours. 4. Pesticides owing onto your neighbors property. Possible solution: civil litigation. Sue your neighbor for a tort violation. Receive money damages for harm done and perhaps injunctive relief against future occurrences. 5. Smoking in public park, smoke gets in someones face. Possible solution: government makes smoking in the park a criminal oense. 6. Emissions from your factory increasing disease and death among the general public. Specic victims cannot be identied so tort law wont work. Some possible solutions: Penalties: jail time or nes. Taxation of pollution. Tradable pollution rights:

 Allow some total amount of pollution (a cap) of a particular kind in a particular area. Grant licenses to existing polluters that add up to this total. Allow them to buy and sell rights. Benet: costs are shifted to those who can bear them most eciently. Downside: selecting a cap is tricky. Everyone must believe the cap will not be raised. Book example: three rms p. 299. Possible approaches to reducing 90,000 units of pollution per month to 45,000: Require each factory to cut 15,000 units. Impose the entire burden on factories A and B. Tax each factory $2.01 per unit of pollution per month. Another example: car emissions. Current approach: smog check with a cap on repair expenses and exemption for classic cars. Alternative: spectrographics sensors detecting exhaust emissions. Multiply each emission rate by miles per year times a money charge per unit of emission. Adjust money rates till air quality reaches an acceptable level. 7. Congestion pricing to alleviate road congestion: tolls varying by time of day. Being implemented in some areas. 8. Charges for entering downtown areas: 5 for central London, $8 proposed for entering Manhattan south of 86th St. Mayor of SF interested. 9. The Rainey Sanctuary in Louisiana. Question 12 p. 311. Question 22. 10. Oil reneries in California. Allow oil companies to blend dierent grades of gasoline with dierent degrees of cleanliness? Positive externalities Positive externalities can be thought of as benets that are not paid for. Most positive externalities are trivial and pose no problems: I benet from seeing your nice lawn but dont contribute to its upkeep. I enjoy walking through the plaza by the Fairmount Hotel but dont pay for it. 2

 I enjoy reading about the iPhone and looking at one in the Apple store but dont plan to buy one. Non-excludable or non-rivalrous goods: one persons consumption doesnt exclude the possibility of another person also consuming the good. Example: radio broadcasts. Non-excludable goods may never be produced if no one steps up to pay for them, hoping others will so they can ride free. Examples: Flood control project Police and re protection Mosquito control Public education It is desirable to live among educated people and this is thought to justify forcing taxpayers to provide schools. The results are less than stellar. Voucher proposals. Summary Markets said to over-produce negative externalities, under-produce positive externalities: market failure. Both of these are used to justify government suppression of negative externalities and subsidy or direct provision of positive externalities. Markets sometimes produce surprising solutions. Governments sometimes fail to produce the desired solutions.