Externalities, Pollution and Global Warming

Topic 4 Externalities, pollution and Global Warming ECON 1210B economic science and Society 1 Introduction Recall Markets are usually a ethical way to organize economic activity In the absence of mart failures, the commercialise take is effective, maximizes total surplus One study type of market failure foreignities outwardness the uncompensated impact of unmatchable persons actions on the well-being of a bystander 2 Externalities and EfficiencyIn the straw man of outwardness, market equilibrium is no longer efficient Individuals estimates of resources lever (or court) are not correct (from the inns story of view) Traditional belief brass to step in to ensure efficient resource allocation And to protect the interest of bystanders as well 3 cast out outwardness Negative outwardness the effect on bystanders is ominous fashion model the neighbors barking dog talking on cellular teleph superstar phone while driving makes the roads less safe for others wellness risk t o others from second-hand smoke noise pollution from construction hurtles 4 defilement A Negative ExternalityFirms burn huge quantities of fossil fuels (coal, natural gas, oil) that creator acid rain and global warming Firms dump toxic risky into rivers, lakes, and oceans These environmental issues are simultaneously everybodys problem and nobodys problem 5 Pollution A Negative Externality Example of oppose outwardness Air pollution from factory Firm does not bear the full equal of its production, so for frustrate produce more(prenominal) than(prenominal) than the lovingly efficient quantity How govt may improve the market outcome Impose a disciplinary appraise on the firm equate to the external be of the pollution it generates 6 Recap of Welfare EconomicsP $5 4 3 $2. 50 2 1 0 The market for gasoline The market eqm maximizes consumer + producer surplus. Supply curve shows semi common soldier cost, the cost directly incurred by sellers Demand curve shows private pry , the honor to buyers (the prices they are willing to pay) 0 10 20 25 30 Q ( gallons) 7 abridgment of a Negative Externality Key distinguish private and companionable be Private costs and social costs motley in the presence of outwardness Producer concerns private cost, which neglect the external cost (pollution cost) fond cost represents the resource cost to a participation social cost = private cost + external cost 8Analysis of a Negative Externality P $5 4 3 2 1 0 The market for gasoline Social cost =private+ external cost external cost 0 External cost = look upon of the detrimental impact on bystanders = $1 per gallon (value of ruin Supply (private cost) from smog, greenho utilisation gases) 10 20 30 Q (gallons) 9 Analysis of a Negative Externality P $5 4 3 2 D 1 0 The market for gasoline Social cost S The socially The socially best quantity optimal quantity is 20 gallons. is 20 gallons.At any Q 20, At any Q 20, value of additional gas value of additional gas exceed s social cost exceeds social cost At any Q 20, At any Q 20, social cost of the social cost of the last gallon is last gallon is greater than its value greater than its value 10 0 10 20 25 30 Q (gallons) Analysis of a Negative Externality P $5 4 3 2 D 1 0 The market for gasoline Mkt eqm (Q = 25) Social cost is greater than social optimum S (Q = 20) overproduction resulted in DWL (red triangle) One solution chit-chat a corrective appraise of $1/gallon on sellers, swap supply curve up $1 11 0 10 20 25 30 Q (gallons) Internalizing the ExternalityInternalizing the externality altering inducings so that mountain take account of the external effects of their actions previous example $1/gallon tax on sellers makes sellers costs equal to social costs When market participants must pay social costs, the market eqm matches the social optimum. dread the tax on buyers would achieve the same outcome market Q will equal optimal Q 12 Summary For Pollution A Negative Externality With cast ou t externality, QMarket QSocial Optium firms over-produce (DWL exist) Remedy The administration batch internalize the externality by imposing corrective tax Price tax S SQ = Qmarket = initial eqm Q = QSocial Optium = eqm after tax D Q Q Quantity 13 Externality in Consumption Consumption of alcohol, tobacco, and gasoline (private driving) all create negative externality to the society Got impose a heavy corrective tax on these goods to alter the incentives of customers, in order to mitigate of negative externality 14 strict Tax Rate (Levy / Charges) in HK Alcohol hundred% tax rate for alcohol with strength of more than 30% by volume Cigarettes $1. 7 / separately cigarette, tax for a pack of 20-stick cigarettes = $34 70% of the selling price of $50 / pack Leaded gas $6. 823/ litre, unleaded petrol $6. 6/ litre About 40% of the selling price of each litre of gasoline 15 Example petrol Tax Targets 3 Negative Externalities Congestion the more you drive, the more you direct to c ongestion Accidents larger vehicles cause more damage in an chance event Pollution burning fossil fuels produces greenhouse gases 16 Case battlefield Environmental Levy on Plastic shop Bags in HK s outhouse indicates that some 8 billion (8,000,000,000) ductile shopping bags are given up of at landfills every year in HK This translates into more than 3 plastic shopping bags per person per day, which apparently go beyond our needs 7 Case Study Environmental Levy on Plastic Shopping Bags in HK Address the problem of abuse, gov introduced an levy of $0. 5 HKD on each plastic shopping bag at the retail train Estimated negative externality of each plastic bag = ? 18 decreed Externality Positive Externality the effect on bystanders is beneficial Example When you get a influenza vaccination, everyone you come into contact with benefits Research and Development (R&D) creates companionship others can use Renovating your house increases neighboring property values Restores of historic b uilding 19 Positive Externalities from EducationA more educated population benefits society lower crime rates educated people have more opportunities, so less likely to rob and steal better government educated people make better-informed voters People do not care these external benefits when deciding how much education to purchase 20 Positive Externalities from Education resolving power market eqm Q of education too low How govt may improve the market outcome subsidize cost of education In the presence of a positive externality, the social value of a good admits private value the direct value to buyers external benefit the value of the positive impact on bystanders 21Analysis of a positive externality P The market for flu shots $50 40 30 20 10 0 0 10 20 30 S D External benefit = $10/shot Draw the social value curve. Find the socially optimal Q. What policy would internalize this externality? Q 22 Analysis of a positive externality P The market for flu shots $50 40 30 20 10 0 0 10 20 25 30 external benefit S Mkt eqm Q = 20 Social optimal Q = 25 underproduction resulted in DWL (red triangle) Social value = private value + external benefit D To internalize the externality, use Q subsidy = $10/shot. 23Case Study Innovation and Technology indemnity in HK Should government subsidize high tech companies? Pros Spillover effects International competitiveness Cons Potential misallocation of public resource Potential problems of unfairness & corruption 24 Case Study Innovation and Technology Policy in HK Eg Cyberport IT project? 25 Summary Corrective Tax and Subsidy to look at With Externalities If negative externality market produces a larger quantity than is socially wanted If positive externality market produces a smaller quantity than is socially desirable 6 Summary Corrective Tax and Subsidy to Deal With Externalities remedy the problem internalize the externality tax goods with negative externalities nonpareil corrective tax = external cost subsidize goods w ith positive externalities nonsuch corrective subsidy = external benefit 27 Private Solutions to Externalities? Government intervention is always controversial Major concerns of government intervention include fairness and ability The market does develop some possible solutions to externality over time 28 Private Solutions to Externalities?Social norms / moral codes Eg littering Mergers Eg MTR as a property developer Contracts between market participants and the affected bystanders However If an externality affects many people, contract negotiation is virtually impossible 29 habitual Policies Toward Negative Externalities Market-based policies provide incentives so that private decisionmakers will choose to crystalize the problem on their own Corrective Tax Tradable Pollution Permits 30 Public Policies Toward Negative Externalities Command-and-control policies Regulation regulate behavior directly.Examples limits on quantity of pollution happented requirements that firms adopt a particular technology to number emissions 31 Policy pick Example Ace Electric and truncheon agent both are running coal-burning power plants Each emits 40 lashings of sulfur dioxide per month SO2 causes acid rain & other health issues Policy goal reducing SO2 emissions 25% to 60 tons/month 32 Policy Option Regulation Vs Corrective Tax Policy extracts 1. mandate require each plant to cut emissions by 25% 2. corrective tax make each plant pay a tax on each ton of SO2 emissions. Set tax at level that achieves goal. 33Policy Option Regulation Vs Corrective Tax Under Policy option 1, regulation, firms have no incentive to reduce emissions beyond the 25% sucker Suppose cost of reducing emissions is lower for Ace Electric than for Billy Power Socially efficient outcome Ace Electric reduces emissions more than Billy Power 34 Policy Option Regulation Vs Corrective Tax Corrective tax is a price on the right on to pollute Under policy option 2, tax on emissions gives firms incentive to continue reducing emissions as long as cost of doing so is less than the tax If a cleaner technology available, tax gives firms incentive to adopt it Tax payment is moneySo, corrective taxes enhance efficiency by aligning private with social incentives 35 Policy Option Tradable Pollution Permits Recall Ace Electric and Billy Power each emit 40 tons SO2, total of 80 tons. Goal reduce 25% emissions to 60 tons/month Policy option 3 Tradable Pollution Permits issue 60 permits, each allows its holder to emit one ton of SO2 give 30 permits to each firm establish market for trading permits 36 Policy Option Tradable Pollution PermitsEach firm can choose among these options emit 30 tons of SO2, using all its permits emit 30 tons, sell unused permits buy additional permits so it can emit 30 tons 37 Policy Option Tradable Pollution Permits A system of tradable pollution permits achieves goal at lower cost than regulation Firms with low cost of reducing pollution (Ace Electric) sell any(pr enominal) permits they can Firms with high cost of reducing pollution (Billy Power) buy permits Result incentive to reduce pollution permit = money 38Tradable Pollution Permits in the Real World Emission of greenhouse gases causes the global warming The firsthand greenhouse gas in the atmosphere is the emission of carbon dioxide carbon paper emissions trading is a form of emissions trading that specifically targets carbon dioxide 39 Tradable Pollution Permits in the Real World Carbon emissions permits traded in atomic number 63 since January 1, 2005 Recall permit = money Firms will have strong incentive to reduce carbon emissions 40