THE ECONOMICS OF THE PUBLIC SECTOR

Содержание

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Maximized total benefit

Recall: Adam Smith’s “invisible hand” of the marketplace leads self-interested

Maximized total benefit Recall: Adam Smith’s “invisible hand” of the marketplace leads
buyers and sellers in a market to maximize the total benefit that society can derive from a market.
But market failures can still happen.

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EXTERNALITIES AND MARKET INEFFICIENCY

An externality refers to the uncompensated impact of

EXTERNALITIES AND MARKET INEFFICIENCY An externality refers to the uncompensated impact of
one person’s actions on the well-being of a bystander.
Externalities cause markets to be inefficient, and thus fail to maximize total surplus.

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EXTERNALITIES AND MARKET INEFFICIENCY

An externality arises...
. . . when a person engages

EXTERNALITIES AND MARKET INEFFICIENCY An externality arises... . . . when a
in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect.

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EXTERNALITIES AND MARKET INEFFICIENCY

When the impact on the bystander is adverse, the

EXTERNALITIES AND MARKET INEFFICIENCY When the impact on the bystander is adverse,
externality is called a negative externality.
When the impact on the bystander is beneficial, the externality is called a positive externality.

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EXTERNALITIES AND MARKET INEFFICIENCY

Negative Externalities
Automobile exhaust
Cigarette smoking
Pollution
Loud stereos in an apartment

EXTERNALITIES AND MARKET INEFFICIENCY Negative Externalities Automobile exhaust Cigarette smoking Pollution Loud
building

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EXTERNALITIES AND MARKET INEFFICIENCY

Positive Externalities
Immunizations
Restored historic buildings
Research into new technologies

EXTERNALITIES AND MARKET INEFFICIENCY Positive Externalities Immunizations Restored historic buildings Research into new technologies

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The Market for Aluminum

Quantity of

Aluminum

0

Price of

Aluminum

The Market for Aluminum Quantity of Aluminum 0 Price of Aluminum

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EXTERNALITIES AND MARKET INEFFICIENCY

Negative externalities lead markets to produce a larger quantity

EXTERNALITIES AND MARKET INEFFICIENCY Negative externalities lead markets to produce a larger
than is socially desirable.
Positive externalities lead markets to produce a smaller quantity than is socially desirable.

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Welfare Economics, An example

The Market for Aluminum
The quantity produced and consumed

Welfare Economics, An example The Market for Aluminum The quantity produced and
in the market equilibrium is efficient in the sense that it maximizes the sum of producer and consumer surplus.
If the aluminum factories emit pollution (a negative externality), then the cost to society of producing aluminum is larger than the cost to aluminum producers.

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Welfare Economics: An example

The Market for Aluminum
For each unit of aluminum

Welfare Economics: An example The Market for Aluminum For each unit of
produced, the social cost includes the private costs of the producers plus the cost to those bystanders adversely affected by the pollution.

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Pollution and the Social Optimum

Copyright © 2004 South-Western

Quantity of

Aluminum

0

Price of

Aluminum

Pollution and the Social Optimum Copyright © 2004 South-Western Quantity of Aluminum 0 Price of Aluminum

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Negative Externalities

The intersection of the demand curve and the social-cost curve

Negative Externalities The intersection of the demand curve and the social-cost curve
determines the optimal output level.
The socially optimal output level is less than the market equilibrium quantity.

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Negative Externalities

Internalizing an externality involves altering incentives so that people take account

Negative Externalities Internalizing an externality involves altering incentives so that people take
of the external effects of their actions.

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Negative Externalities

Achieving the Socially Optimal Output
The government can internalize an externality

Negative Externalities Achieving the Socially Optimal Output The government can internalize an
by imposing a tax on the producer to reduce the equilibrium quantity to the socially desirable quantity.

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Positive Externalities

When an externality benefits the bystanders, a positive externality exists.
The social

Positive Externalities When an externality benefits the bystanders, a positive externality exists.
value of the good exceeds the private value.

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Positive Externalities

A technology spillover is a type of positive externality that exists

Positive Externalities A technology spillover is a type of positive externality that
when a firm’s innovation or design not only benefits the firm, but enters society’s pool of technological knowledge and benefits society as a whole.

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Education and the Social Optimum

Copyright © 2004 South-Western

Quantity of

Education

0

Price of

Education

Education and the Social Optimum Copyright © 2004 South-Western Quantity of Education 0 Price of Education

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Positive Externalities

The intersection of the supply curve and the social-value curve determines

Positive Externalities The intersection of the supply curve and the social-value curve
the optimal output level.
The optimal output level is more than the equilibrium quantity.
The market produces a smaller quantity than is socially desirable.
The social value of the good exceeds the private value of the good.

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Positive Externalities

Internalizing Externalities: Subsidies
Used as the primary method for attempting to

Positive Externalities Internalizing Externalities: Subsidies Used as the primary method for attempting
internalize positive externalities.
Industrial Policy
Government intervention in the economy that aims to promote technology-enhancing industries
Patent laws are a form of technology policy that give the individual (or firm) with patent protection a property right over its invention.
The patent is then said to internalize the externality.

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PRIVATE SOLUTIONS TO EXTERNALITIES

Government action is not always needed to solve the

PRIVATE SOLUTIONS TO EXTERNALITIES Government action is not always needed to solve the problem of externalities.
problem of externalities.

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PRIVATE SOLUTIONS TO EXTERNALITIES

Moral codes and social sanctions
Charitable organizations
Integrating different types of

PRIVATE SOLUTIONS TO EXTERNALITIES Moral codes and social sanctions Charitable organizations Integrating
businesses
Contracting between parties

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The Coase Theorem

The Coase Theorem is a proposition that if private parties

The Coase Theorem The Coase Theorem is a proposition that if private
can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own.
Transactions Costs
Transaction costs are the costs that parties incur in the process of agreeing to and following through on a bargain.

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Why Private Solutions Do Not Always Work

Sometimes the private solution approach fails

Why Private Solutions Do Not Always Work Sometimes the private solution approach
because transaction costs can be so high that private agreement is not possible.

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PUBLIC POLICY TOWARD EXTERNALITIES

When externalities are significant and private solutions are not

PUBLIC POLICY TOWARD EXTERNALITIES When externalities are significant and private solutions are
found, government may attempt to solve the problem through .
command-and-control policies.
market-based policies.

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PUBLIC POLICY TOWARD EXTERNALITIES

Command-and-Control Policies
Usually take the form of regulations:
Forbid certain

PUBLIC POLICY TOWARD EXTERNALITIES Command-and-Control Policies Usually take the form of regulations:
behaviors.
Require certain behaviors.
Examples:
Requirements that all students be immunized.
Stipulations on pollution emission levels set by the Ministry Environmental Protection .

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PUBLIC POLICY TOWARD EXTERNALITIES

Market-Based Policies
Government uses taxes and subsidies to align

PUBLIC POLICY TOWARD EXTERNALITIES Market-Based Policies Government uses taxes and subsidies to
private incentives with social efficiency.
Pigovian taxes are taxes enacted to correct the effects of a negative externality.

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PUBLIC POLICY TOWARD EXTERNALITIES

Examples of Regulation versus Pigovian Tax
If the MEP

PUBLIC POLICY TOWARD EXTERNALITIES Examples of Regulation versus Pigovian Tax If the
decides it wants to reduce the amount of pollution coming from a specific plant. The MEP could…
tell the firm to reduce its pollution by a specific amount (i.e. regulation).
levy a tax of a given amount for each unit of pollution the firm emits (i.e. Pigovian tax).

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PUBLIC POLICY TOWARD EXTERNALITIES

Market-Based Policies
Tradable pollution permits allow the voluntary transfer

PUBLIC POLICY TOWARD EXTERNALITIES Market-Based Policies Tradable pollution permits allow the voluntary
of the right to pollute from one firm to another.
A market for these permits will eventually develop.
A firm that can reduce pollution at a low cost may prefer to sell its permit to a firm that can reduce pollution only at a high cost.

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The Equivalence of Pigovian Taxes and Pollution Permits

Quantity of

Pollution

0

Price of

Pollution

(a) Pigovian Tax

The Equivalence of Pigovian Taxes and Pollution Permits Quantity of Pollution 0

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Figure The Equivalence of Pigovian Taxes and Pollution Permits

Quantity of

Pollution

0

(b) Pollution Permits

Price

Figure The Equivalence of Pigovian Taxes and Pollution Permits Quantity of Pollution
of

Pollution

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Summary

When a transaction between a buyer and a seller directly affects a

Summary When a transaction between a buyer and a seller directly affects
third party, the effect is called an externality.
Negative externalities cause the socially optimal quantity in a market to be less than the equilibrium quantity.
Positive externalities cause the socially optimal quantity in a market to be greater than the equilibrium quantity.

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Summary

Those affected by externalities can sometimes solve the problem privately.
The Coase theorem

Summary Those affected by externalities can sometimes solve the problem privately. The
states that if people can bargain without a cost, then they can always reach an agreement in which resources are allocated efficiently.
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