Externalities

1
Externalities
2
Negative Externality in Production

MCs
MCp
B
A-B is the social surplus when quantity is Qp
Market Price 5
D
A
C
Qs
Qp
Q
3
A Pigou Tax

MCsMCp after tax
MCp
5
Qs
Qp
Q
4
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5
Negative Externality

MCs
MCp
B
5
D
A
C
Qs
Qp
Q
6
Coase

• Suppose that each unit of production generates an
  externality of 2 (the neighbor is willing to pay
  2 to cut one unit of production).
• If the property right to pollute belongs to the
  firm, the neighbor might contact the firm and
  offer a payment to cut production. BD is the
  maximum amount that consumers are willing to pay
  to cut production from Qp to Qs. D is the minimum
  amount that producers are willing to accept to
  cut production from Qp to Qs.
• If the property right to pollute belongs to the
  neighbor the firm will contact him or her to
  offer a payment in order to produce. AC is the
  maximum amount that producers are willing to pay
  to produce Qs. C is the minimum amount that
  consumers are willing to accept to authorize the
  company to produce Qs.

7
The Coase Theorem
8
The Coase Theorem

• In the absence of transactions costs, private
  costs equal social costs.
• In the absence of transactions costs, the
  assignment of property rights has not effect on
  social welfare.
• In the absence of transactions costs, the Pigou
  tax can be harmful. Consumers may offer side
  payments to producers leading to too little
  pollution. Consumers are willing to pay C to
  reduce production to cero. IF CgtA there is no
  production.

9
Negative Externality

MCptax
MCp
B
5
D
A
C
Qs
Qp
Q
10
Positive Externality in Production

MCp
MCs
B
5
D
A
C
Qp
Qs
Q
11
Externalities in Consumption

• Negative Externality Smoking.
• Positive externality your roommate buys a TV.