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Externalities, public goods and common resources (public goods and common…

- - - - If the impact is beneficial, it is called a positive externality
        
        e.g., your neighbour’s beautiful garden; research into new technologies
      - If the impact is harmful, it is called a negative externality
        
        e.g., your neighbour’s beautiful garden (if you are allergic to pollen); noise from a lawn mower
  - - - Market output less than socially desirable
    - - Market output greater than socially desirable
  - - - a lack of clearly established property rights
        
        e.g. overfishing in the ocean; no over-fishing in private fish farms
      - Difficulty in enforcing property rights
        
        e.g., Pollution
    - - private solutions
        
        Moral codes and social sanctions
        
        Example: Litter
        
        Laws against littering are not vigorously enforced. Most people choose not to litter simply because it is the wrong thing to do.
        
        Charity
        
        Example: Education
        
        Private individuals and corporations sometimes sponsor scholarships and prizes for university students
        
        Vertical integration
        
        苹果园与养蜂人
        
        These externalities could be internalised if the beekeeper bought the apple orchard or if the apple grower bought the beehive.
        
        Contract
        
        The Coase theorem科斯定理: If property rights are clearly assigned and if transaction costs are low, then bargaining between relevant parties will result in efficient resource allocation. How property rights are assigned affects wealth distribution, but does not affect resource allocation.
        
        When does the Coase theorem apply
        
        The Coase theorem applies
        
        If the interested parties can reach an agreement and enforce it.
        
        It may not work
        
        if the transaction costs (the costs that parties incur in the process of agreeing and following through on a bargain) are so high that no agreement is reached.
        
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        Example
        
        A contract between the apple grower and the beekeeper can solve the problem of too few trees and too few bees. The contract can specify the number of trees, the number of bees and perhaps a payment from one party to the other.
      - Public policies
        
        Command and control
        
        Require or forbid certain activities by regulation
        
        Difficulties
        
        Information requirement
        
        The regulator needs to know the details about specific industries and about the alternative technologies that those industries could adopt.
        
        Monitoring and compliance costs 监督和合规成本
        
        Market-based policies
        
        provide market participants with incentives to take externalities into account in their production and consumption decisions
        
        Corrective taxes and subsidies
        
        An ideal corrective tax = the external cost; and an ideal corrective subsidy = the external benefits
        
        Difficulties
        
        Information requirement: the government must be able to determine the magnitude 量级 of the externality.
        
        Monitoring costs (on government) and compliance costs (on firms)
        
        Tradable pollution permits
        
        Each permit allows a firm to emit a unit of pollution
        
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        A market for the permits
        
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        Result
        
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        example
        
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- - - - Excludable and rival in consumption.
        
        You don’t get the good unless you pay for it and once you get it you are the only person who benefits.
        
        Most goods in the economy are private goods.
        
        Examples: ice-creams, clothing and congested toll roads.
    - - Excludable but not rival in consumption.
        
        Fire protection in a small town.
        
        Excludable: the fire brigade can just let their houses burn down.
        
        Not rival: Fire-fighters spend much of their time waiting for a fire, so protecting an additional household is unlikely to reduce the protection available to others.
        
        Other examples
        
        cable TV and uncongested toll roads
    - - Rival in consumption but not excludable
        
        Fish in the ocean
        
        rival: when one person catches fish, there are fewer fish for the next person to catch.
        
        not excludable: cannot stop people from fishing
        
        Other examples
        
        Wildlife; Congested non-toll roads.
    - - Non-excludable and non-rival.
        
        National defence
        
        Non-excludable: Once the country is defended from foreign aggressors, it is impossible to prevent any single person from enjoying the benefit
        
        Non-rival: When one person enjoys the benefit of defence, she does not reduce the benefit to anyone else
        
        Other examples
        
        Knowledge; uncongested non-toll roads
  - - - For public goods and common resources, externalities arise because something of value has no price attached to it.
        
        An individual can benefit from a public good such as national defence without paying
        
        An individual can fish in the ocean causing a loss to others without paying
  - - - The existence of free riders can lead to the under-provision供应不足 of public goods.
        
        If private suppliers can’t charge free riders, they are reluctant 不愿意 to supply the goods.
    - - Fireworks are not excludable. People could see the fireworks even without a ticket, so they have an incentive to free ride.
        
        The market would fail to provide the efficient outcome
        
        Even if there is a net benefit from a fireworks display, private entrepreneurs will not supply it because they cannot be compensated for their costs.
        
        The government can potentially remedy the problem
        
        If the government decides that the total benefits exceed the costs, it can provide the public good and pay for it with tax revenue.
  - - - A commons is communal land surrounding a village. Each family in the village has the right to graze sheep on the commons.
        
        Rival: when one family’s flock grazes on the common land, it reduces the quality of the land available for other families.
        
        Consequence of the negative externality: An excessive number of sheep grazing on the commons.
    - - Establish property rights through privatisation
        
        Solve the problem at the source, but often not practical
      - Government restrictions
        
        e.g., The governments of Canada, New Zealand and Iceland use tradeable quota to restrict access to ocean fisheries.
      - Collective solution
        
        Users design durable cooperative institutions that govern the use of common resources
  - - - One person’s use of a good diminishes other people’s ability to use the same good
    - - A person can be prevented from using a good
        
        e.g. I can stop other people have this good.