Externalities and Public Policy

8 Key excerpts on "Externalities and Public Policy"

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  eBook - PDF

  Fundamentals of Environmental Economics

  • Kumar, A(Authors)
  • 2021(Publication Date)
  • Daya Publishing House

    (Publisher)

  Chapter 3 Externalities Meaning, Sources and Types Externalities arise when certain actions of producers or consumers have unintended external (indirect) effects on other producers or/and consumers. Externalities may be positive or negative. Positive externality arises when an action by an individual or a group confers benefits to others. A technological spillover is a positive externality and it occurs when a firm’s invention not only benefits the firm but also enters into the society’s pool of technological knowledge and benefits the society as a whole. Negative externalities arise when an action by an individual or group produces harmful effects on others. Pollution is a negative externality. When a factory discharges its untreated effluents in a river, the river is polluted and consumers of the river water bear costs in the form of health costs or/and water purification costs. In an activity generating positive externality, social benefit is higher than private benefit and in an activity generating negative externality, social cost is higher than private cost. Thus, in the presence of externalities, social benefits (costs) and private benefits (costs) differ. The divergence between private benefits (costs) and social benefits (costs) results in inefficiency in resource allocation. Producers of externalities do not have any incentive to take into account the effects of their actions on others. In a competitive market economy, private optimum output is determined at the point where marginal private cost equals price. When a positive externality occurs, the marginal social benefit will be higher than the marginal private benefit (price) and hence the private optimal output will be lower than the social optimal output. When a negative externality occurs the marginal social cost will be higher than the marginal private cost (price) and This ebook is exclusively for this university only. Cannot be resold/distributed.

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  Quiet Revolution in Welfare Economics

  • Michael Albert, Robin Hahnel(Authors)
  • 2017(Publication Date)
  • Princeton University Press

    (Publisher)

  236 The Prevalence of Externalities and Public Goods 2. There is no qualitative difference between public goods and exter- nalities and no reason to treat them differently at a theoretical level. Public goods or bads are simply externalities whose effects are more pervasive than what convention has chosen to call an externality. Externalities are simply public goods or bads whose effects are too circumscribed to merit the label public. 3. The primary intentions of the economic actor whose decision generates external effects for others and the private or public status of that actor, are of no theoretical consequence as far as social efficiency is concerned. 4. The issue is not the characteristics of goods but the characteristics of markets, since it is the market/propertyrightsystem that establishes who gets to make what decisions. How is it that "traditional solutions" that involve a government with coercive powers might improve matters? And why have economists con- cluded that while "traditional solutions" might improve upon market allocation and voluntary association, they are all, to some extent, inevitably flawed? Here we will uncover a very peculiar lack of rigor in the analysis by traditional welfare theorists. Suppose we substitute a government for the market-property-right system of allocating resources in all cases where external effects exist and instruct the government to do so in a socially efficient manner. The goverment must decide two things: how much of each activity that generates effects external to the market decision-making process should occur, and how much to assess each citizen to defray whatever costs may arise from implementing its first decision. In language more familiar to students of public finance, the goverment must make (1) a decision about expenditures—how much to spend on the provision of different public goods, and (2) a decision about taxation—how to collect the revenues necessary to cover the expenditures.

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  eBook - ePub

  Environmental and Natural Resources Economics

  Theory, Policy, and the Sustainable Society

  • Steven Hackett, Sahan T. M. Dissanayake(Authors)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  Chapter 7 .

  Summary

  • Positive externalities are unpaid-for benefits to society generated as a by-product of production and exchange. When there are important positive externalities, market demand based on the private benefits of buyers understates the full social benefits of the good or service generating the external benefit. Consequently, too little of the good or service generating the positive externality is produced in otherwise well-functioning competitive markets. Subsidies represent a form of policy intervention that can enhance market efficiency by internalizing the positive externality. Positive externalities can also affect the supply curve, such as when there are knowledge spillover externalities.
  • While the legal system is designed to protect property, open-access and public trust resources were not traditionally protected under common law from pollution harms and thus remain subject to degradation. The legal system does not function perfectly, of course, and so pollution harms to people, their homes, and other valuable objects that are property do regularly occur. One problem is in determining the source of the pollution when there may be very large numbers of emitters, as is the case with automobile exhaust.
  • Negative externalities are uncompensated damage costs borne by members of society. These negative externalities are generated as a by-product of production and exchange. Profit-maximizing firms have an incentive to transform private costs into negative externalities (external costs) in the absence of regulation or reputation effects. When there are important negative externalities, market supply based on private costs to sellers is too large, leading to too much of the good or service generating the negative externalities being produced in otherwise well-functioning competitive markets. Pigouvian taxes represent a form of policy intervention that can enhance market efficiency.

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  Classic Papers in Natural Resource Economics

  • C. Gopalakrishnan(Author)
  • 2000(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The legal position has also been modi- fied by statutory enactments. 53 Williams, op. cit. supra n. 49 at 242, 258. 54 Boulston v. Hardy, Cro. Eliz., 547, 548, 77 Eng. Rep. 216. 55 Williams, op. cit. supra n. 49 at 243. 56 58 Sol. J. 612 (1913–1914). 57 Williams, op. cit. supra n. 49 at 259. 58 Pigou, op. cit. supra n. 35 at 185. 59 Williams, op. cit. supra n. 49 at 244–47. 60 Pigou, op. cit. supra n. 35 at 192. 61 Id. 174–75. 62 Id. 177–83. 63 Id. 175–77. 64 Id. 192–4, 381 and Public Finance 94–100 (3d ed. 1947). The Problem of Social Cost 137 6 Externality James M. Buchanan and William C. Stubblebine Externality has been, and is, central to the neo-classical critique of market organisation. In its various forms – external economies and dis- economies, divergencies between marginal social and marginal private cost or product, spillover and neighbourhood effects, collective or public goods – externality dominates theoretical welfare economics, and, in one sense, the theory of economic policy generally. Despite this importance and emphasis, rigorous definitions of the concept itself are not readily available in the literature. As Scitovosky has noted, “defini- tions of external economies are few and unsatisfactory”. 1 The following seems typical: External effects exist in consumption whenever the shape or posi- tion of a man’s indifference curve depends on the consumption of other men. [External effects] are present whenever a firm’s production func- tion depends in some way on the amounts of the inputs or outputs of another firm. 2 It seems clear that operational and usable definitions are required. In this paper, we propose to clarify the notion of externality by defin- ing it rigorously and precisely. When this is done, several important, and often overlooked, conceptual distinctions follow more or less auto- matically.

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  How to Regulate

  A Guide for Policymakers

  • Thomas A. Lambert(Author)
  • 2017(Publication Date)
  • Cambridge University Press

    (Publisher)

  Taken 2 Because pollution involves cost spillovers, the discussion here will focus primarily (though not exclusively) on potential remedies for negative externalities. Positive externalities are usually addressed either by subsidization, which is discussed below, or by having the government perform the externality-causing activity. When the government uses tax revenue to engage in an activity subject to positive externalities, it is not engaging in “regulation” as we have defined the term for purposes of this book. We will therefore spend little time here on positive externalities. Remedies, Implementation Difficulties, Side Effects 29 together, these flexible, judge-made doctrines go a long way toward preventing negative externalities and the social losses they create. Practical enforcement and bargaining difficulties, though, may prevent the common law from achieving optimal deterrence of negative externalities. If a polluting factory imposes a small but significant amount of harm on each of a thousand neighbors, for example, no single neighbor may incur the expense of a lawsuit to stop the conduct at issue, even though the total amount of uncompensated damage (and the inefficiency resulting from the externality) is substantial. Even if that difficulty could be overcome through the class action mechanism, a pure common law approach may not be optimal. Because the outcomes of class action lawsuits are unpredictable and potentially catastrophic, the factory owner would likely prefer to compen- sate his injured neighbors up front in exchange for a release from liability. Negotiating with hundreds of neighbors, though, would be extremely costly, particularly since each neighbor would have an incentive to be the last hold- out so as to extract the greatest possible compensation.

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  Microeconomics

  A Contemporary Introduction

  • William A. McEachern(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  C H E C K P O I N T How specifically has the federal government regulated air, water, and land pollution? 17-4 Positive Externalities To this point, we have considered only negative externalities. But externalities are some-times positive, or beneficial. Positive externalities occur when consumption or produc-tion benefits other consumers or other firms. For example, people who get inoculated against a contagious disease reduce their own likelihood of contracting the disease (the personal benefit), but they also reduce the risk of transmitting the disease to others Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 17 Externalities and the Environment 393 (the external benefit). Parents who don’t get their children vaccinated risk triggering an epidemic, so the vaccination decision is not simply a private matter. For example, the Centers for Disease Control and Prevention recently reported an outbreak of measles in 17 states because some children were not vaccinated. 24 Another positive externality results from education. Society as a whole receives exter-nal benefits from education because those with more education become better citizens, can read road signs, are better able to support themselves and their families, and are less likely to require public assistance or to resort to violent crime for income. Researchers found that more schooling significantly reduces the probability of incarceration. 25 Also, the higher the minimum dropout age for school, the lower the arrest rate for property and violent crimes among 16-to-18-year-olds.

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  A Moderate Compromise

  Economic Policy Choice in an Era of Globalization

  • S. Suranovic(Author)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Real World Implications Almost all economic analysis of policy options in a model with mar- ket imperfections assumes that there is just one imperfection to be A Moderate Compromise 34 corrected. In those circumstances, it is fairly straightforward to deter- mine the optimal policy and to compare the best trade policy with the best domestic policy. However, things become increasingly com- plicated if there are numerous imperfections and distortions at work simultaneously. Surely, this is the situation most reflective of the real world. In the real world, some industries create positive externalities, others negative externalities. Some firms have market power and can affect their market price. Some products are differentiated within an indus- try. Some consumption activities cause positive externality effects; oth- ers cause negative effects; others still cause both positive and negative effects. Unemployment is more likely to develop in some labor markets and is less likely in other markets. Products display different degrees of public good characteristics. Participants in many markets must deal with imperfect and asymmetric information. Finally, some countries have monopoly and monopsony power in trade. These imperfections not only exist, but they vary in strength and importance across industries and across countries. In some countries, labor markets are more flexible than in others. Some economies have greater problems with environmental externalities than other coun- tries, partially because of the age of the capital stock and the choice of fuel. Information problems vary from country to country. Some counties have bona fide infant industries; others do not. The extent of monopolization varies widely and is always changing, especially as some countries privatize state-owned enterprises.

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  Environmental Economics

  Theory and Policy

  • Alfred Endres, Iain L. Fraser(Authors)
  • 2010(Publication Date)
  • Cambridge University Press

    (Publisher)

  However, allowing such a right would go beyond the framework of the “law of the jungle” as an allocation mechanism. Where it is claimed in the text that under this law the utilization plans of the producers of the externalities would prevail, we are ignoring the possibility that those damaged prevent the emissions by force. 3 Cf. chapter A in part two. 4 Cf. section B.III in part three. The Internalization of Externalities as a Central Theme of Environmental Policy 3 Many economists are particularly fascinated by comparing the actual result reached by a particular allocation mechanism with a “socially optimal” result. Of course, it is necessary for this undertaking to develop a criterion of social optimality. If an analysis of the market mechanism finds that the market outcome (“equilibrium”) departs from the optimum, this gives the economist occasion to ponder possible correction mechanisms. 5 We show in detail that the existence of environmental problems (in economic terminology, “externalities”) establishes a divergence between market equilibrium and optimum. The “internalization of externalities” treated in part two of this book is nothing but an attempt to make economic policy corrections to the market mechanism with the aim of bringing equilibrium and optimum together. Of course, the demand that politics should bring about an optimum position is – in the sphere of environmental policy as in any other sphere – for various reasons too ambitious. Nonetheless, it is worthwhile to operationalize the concept of optimality and discover structural causes of market mechanism failures by comparing the market equilibrium with the optimum. Even if, in reality, the optimum will perhaps never be reached, we might still provide guidance to environmental policy, which all too often has its view of what direction to take confused (comprehensible as this may be) by the undergrowth of everyday problems.

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