同济大学：《经济学》课程教学资源（教案讲义）Ch09 Externalities and Public Goods

1907 Ch9 Externalities and Public Goods Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY

Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY Ch9 Externalities and Public Goods

0 10-2 砂 Topics to be Discussed ·Externalities Ways of Correcting Market Failure Externalities and Property Rights Common Property Resources Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY

Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 10-2 Topics to be Discussed • Externalities • Ways of Correcting Market Failure • Externalities and Property Rights • Common Property Resources

1907 10-3 Topics to be Discussed ·Public Goods Private Preferences for Public Goods Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY

Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 10-3 Topics to be Discussed • Public Goods • Private Preferences for Public Goods

10-4 0 © 9.1 Externalities ·Negative -Action by one party imposes a cost on another party ·Positive -Action by one party benefits another party Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY

Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 10-4 9.1 Externalities • Negative – Action by one party imposes a cost on another party • Positive – Action by one party benefits another party

1907 10-5 External Cost ·Scenario -Steel plant dumping waste in a river The entire steel market effluent can be reduced by lowering output(fixed proportions production function) Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY

Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 10-5 External Cost • Scenario – Steel plant dumping waste in a river – The entire steel market effluent can be reduced by lowering output (fixed proportions production function)

10-6 10 External Cost ·Scenario Marginal External Cost(MEC)is the cost imposed on fishermen downstream for each level of production. Marginal Social Cost(MSC)is MC plus MEC. Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY

Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 10-6 External Cost • Scenario – Marginal External Cost (MEC) is the cost imposed on fishermen downstream for each level of production. – Marginal Social Cost (MSC) is MC plus MEC

External Costs When there are negative The differences is The profit maximizing firm externalities,the marginal the marginal external produces at q1 while the social cost MSC is higher cost MEC. efficient output level is q". than the marginal cost. Price MSC Price MC MSCI S=MCI The industry competitive output is Q,while the efficient level is Q* P MECI MEC D q*91 Firm output Q*( Industry output

MC S = MCI D P1 P1 q1 Q1 MSC MSCI When there are negative externalities, the marginal social cost MSC is higher than the marginal cost. External Costs Firm output Price Industry output Price MEC MECI The differences is the marginal external cost MEC. q* P* Q* The industry competitive output is Q1 while the efficient level is Q*. The profit maximizing firm produces at q1 while the efficient output level is q*

10-8 0 External Cost Negative Externalities encourage inefficient firms to remain in the industry and create excessive production in the long run. Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY

Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 10-8 External Cost • Negative Externalities encourage inefficient firms to remain in the industry and create excessive production in the long run

10-9 1907 Externalities Positive Externalities and Inefficiency Externalities can also result in too little production,as can be shown in an example of home repair and landscaping Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY

Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 10-9 Externalities • Positive Externalities and Inefficiency – Externalities can also result in too little production, as can be shown in an example of home repair and landscaping

10-10 10 External Benefits Value When there are positive MSB externalities(the benefits of repairs to neighbors), marginal social benefits A self-interested home owner MSB are higher than invests g in repairs.The marginal benefits D. efficient level of repairs g*is higher.The higher price 0 P,discourages repair. P MC Is research and development MEB discouraged by positive externalities? 91q* Repair Level Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY

Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 10-10 P1 MC External Benefits Repair Level Value D Is research and development discouraged by positive externalities? q1 MSB MEB When there are positive externalities (the benefits of repairs to neighbors), marginal social benefits MSB are higher than marginal benefits D. q* A self-interested home owner invests q1 in repairs. The efficient level of repairs q* is higher. The higher price P1 discourages repair