Chapter 10,11 PART2

Socially Optimal Quantity

• The socially optimal quantity is the amount of a good or service that maximizes social welfare, considering both private costs and benefits as well as external costs.
• In the presence of a negative externality, the socially optimal quantity is less than the market equilibrium quantity.
• This is because the market equilibrium does not account for the external costs imposed by the production or consumption of the good.

Market-Based Solutions to Pollution

• Market-based approaches to reducing pollution use economic incentives to encourage polluters to reduce their emissions.
• Examples include pollution taxes, cap-and-trade systems, and subsidies for environmentally friendly technologies.

Coase Theorem

• The Coase Theorem states that private solutions to externalities are possible when:
  • Property rights are well defined.
  • Transaction costs are low.
• This means that bargaining between the parties involved can lead to an efficient outcome, even in the presence of externalities.

Corrective Taxes

• Corrective taxes, also known as Pigovian taxes, are taxes levied on activities that generate negative externalities.
• They are designed to internalize the external costs of these activities, bringing the market price closer to the socially optimal price.

Limitations of Private Solutions

• One reason why private solutions to externalities do not always work is that transaction costs can be high.
• Other reasons include:
  • Difficulty in defining property rights.
  • Information asymmetry.
  • Free riding.

Public Goods

• Public goods are non-excludable, meaning that it is difficult or impossible to prevent individuals from consuming them, even if they do not pay for them.
• Public goods are also non-rivalrous, meaning that one person's consumption of the good does not reduce the amount available for others.
• Examples include national defense, clean air, and public broadcasting.

Free-Rider Problem

• The free-rider problem arises because individuals can benefit from a public good without contributing to its provision.
• This can lead to under-provision of public goods in a market economy, as individuals are less likely to pay for something they can get for free.

Common Resources

• Common resources are non-excludable, but rival in consumption, meaning that one person's use of the resource reduces the amount available for others.
• This can lead to over-exploitation of common resources, a concept known as the tragedy of the commons.
• Examples include fisheries, forests, and grazing land.

Fireworks Displays - Private Good Example

• Fireworks displays are an example of a private good, as their enjoyment is exclusive to those who pay for them.
• This is because the benefits are limited to those who are able to see and hear the fireworks display.

Tragedy of the Commons

• The tragedy of the commons refers to the tendency for common resources to be overused and depleted because no individual has an incentive to conserve them.
• Each individual focuses on their own short-term gain, leading to the depletion of the resource in the long run.