Externalities and Property Rights

1
Externalities and Property Rights
LECTURE
2
External Costs and Benefits

• Sometimes costs or benefits that result from an
  activity accrue to people not directly involved
  in the activity.
• These are called external costs or external
  benefits -- externalities for short.

3
External Costs and Benefits

• External Cost (negative externality)
• A cost of an activity that falls on people other
  than those who pursue the activity.
• Automobile exhaust
• Goods whose production generates toxic smoke
• Barking dogs (loud pets)
• Loud stereos in an apartment building.

4
When Market Equilibrium is not Social Optimum

• In the market equilibrium for such goods, the
  benefit to buyers of the last good produced is,
  as before, equal to the cost incurred by sellers
  to produce that good.
• But producing that good also results in the costs
  of the associated pollution.

5
When Market Equilibrium is not Social Optimum

• Then the full marginal cost of the last unit
  produced - the sellers private marginal cost
  plus the marginal pollution cost borne by others
  - will be higher than the benefit of the last
  unit produced.

Social marginal cost private marginal cost
marginal
pollution cost
6
External Costs in Production
Costs and benefits
MC S
P
D
Q1
Quantity
7
External Costs in Production
Costs and benefits
MSC
MC S
P
D
Too much production
Social optimum
O
Q1
Quantity
8
When Market Equilibrium is not Social Optimum

• When costs fall on people other than sellers
  market equilibrium quantity gt socially optimal
  quantity.
• Total economic surplus would be higher if output
  of the good were lower.
• Yet neither sellers nor buyers have any incentive
  to alter their behavior.

Potentially, some public policy can be
implemented to discourage the production of this
kind of goods.
9
External Costs in Consumption
Costs and benefits
S
P
MBD
Q1
Quantity
10
External Costs in Consumption
Costs and benefits
S
P
MBD
MSB
Too much production
Social optimum
Q1
Quantity
11
External Costs and Benefits

• External Benefit (positive externality)
• A benefit of an activity received by people other
  than those who pursue the activity.
• Immunizations
• Restored historic buildings
• Research into new technologies

12
When Market Equilibrium is not Social Optimum

• Here, the full marginal benefit of the last unit
  produced - the price paid by the marginal buyer
  plus the benefit received by non-buyers - will be
  higher than the marginal cost of the last unit
  produced.

Social marginal benefit private marginal
benefit marginal benefit
received by non-buyers
13
External Benefits in Consumption
Costs and benefits
S
P
MBD
Q1
Quantity
14
External Benefits in Consumption
Costs and benefits
S
MSB
P
MBD
Social optimum
Too little production
Q1
Quantity
15
When Market Equilibrium is not Social Optimum

• Market equilibrium results in too little
  production of goods that generate external
  benefits.

Potentially, some public policy can be
implemented to encourage the production of this
kind of goods.
Public health programs Unvaccinated populations
are at risk. After vaccination rates dropped in
northern Nigeria in the early 2000s due to
religious and political objections, the number of
measles cases rose significantly, and hundreds of
children died.
16
External Benefits in Production
Costs and benefits
MCS
P
D
O
Quantity
17
External Benefits in Production
Costs and benefits
MSC
MCS
P
D
Social optimum
Too little production
O
Q2
Quantity
18
How Externalities Affect Resource Allocation

• When an activity does not create an externality,
  the optimal level of the activity for the
  individual will equal the socially optimal level
  of the activity.

19
How Externalities Affect Resource Allocation

• When an activity generates a negative
  externality, the level of the activity will be
  greater than the socially optimal level.
• Negative externalities gt too much activity.
• When an activity generates a positive
  externality, the level of the activity will be
  less than the socially optimal level.
• Positive externalities gt too little activity.

20
Recall The Equilibrium Principle

• A market in equilibrium leaves no unexploited
  opportunities for individuals, but may not
  exploit all gains achievable through collective
  action.

21
Negative Externality and Deadweight Loss

• Without external costs QPVT is the social optimum

Social MC
Externality (XC)
MCPVT XC
MCSOC
Private MC
MCPVT

• With external costs the private MC lt social MC
  and the private optimum is more than the social
  optimum.

MB
QSOC
Qpvt
Deadweight loss from negative externality
Quantity
Too much production
22
Positive Externality and Deadweight Loss

• With external benefits the private MB lt social MB
  and the private optimum is less than the social
  optimum.

MBPVT XB
MBSOC
Social demand private demand XB
QSOC
Deadweight loss from positive externality
Quantity (time in minutes)
Too little production
23
Private Solutions to Externalities

• Paul can produce with or without a filter on his
  smokestack.
• Production without a filter results in greater
  smoke damage to Janet.

24
Private Solutions to Externalities
Without filter
With filter
Gains to Paul
Damage to Janet

• The Market
• Without filter Total economic surplus 245 -
  85 160
• With filter Total economic surplus 200 - 35
  165
• gt Total economic surplus goes up if Paul
  installs the filter.

25
Private Solutions to Externalities

• If Paul is not liable for smoke damages and if
  the two parties can negotiate costlessly with one
  another, will he install a filter?

26
Private Solutions to Externalities
Without filter
With filter
Gains to Paul
Damage to Janet

• The filter costs 245-20045.
• Paul doesnt have to install it, but if Janet
  pays him at least 45, he will gladly do so.
• And since the filter results in savings of
  85-3550 for Janet, she will pay Paul to
  install the filter.

27
Private Solutions to Externalities The Coase
Theorem

• If property rights are fully assigned and if
  people can negotiate costlessly with one another,
  they will always arrive at efficient solutions to
  problems caused by externalities.

Ronald Coase (1910 - ), British economist, Nobel
Prize in Economics in 1991
28
The Coase Theorem

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

29
The Coase Theorem

• Traditional (pre-Coase) view
• Paul is the perpetrator, Janet is the victim.
• If it is Pauls smoke that is causing the damage
  to Janet, why should Janet pay Paul to install a
  filter on his smokestack?

30
The Coase Theorem

• Coases insight was that externalities are purely
  reciprocal.
• The smoke harms Janet, true enough.
• But to restrain Paul from producing smoke would
  harm Paul .
• The two parties have a shared interest in
  achieving the outcome that is least costly
  overall.

31
The Coase Theorem

• When the economic pie is larger, everyone can get
  a larger slice.

Paul
Paul
Janet
Janet
Surplus with efficient solution
Surplus with inefficient solution
32
External Cost and Costless Negotiation

• Ted and Bill can live together in a two-bedroom
  apartment for 500/month

33
External Cost and Costless Negotiation

• or each rent a one-bedroom apartment for
  300/month.

34
External Cost and Costless Negotiation

• If the rent were the same, they would be
  indifferent between living together or
  separately, except for one problem
• Ted likes to practice his trumpet late at night
  and this will disturb Bills sleep.

35
External Cost and Costless Negotiation

• Ted would pay up to 150 per month rather than
  reschedule his playing.
• Bill would pay up to 80 per month not to have
  his sleep disturbed.
• Will they live together or separately?

36
External Cost and Costless Negotiation

• The question is whether the benefits of joint
  living exceed the costs.
• The benefit is the 100 per month reduction in
  rent.
• What is the least costly accommodation to the
  trumpet problem?

37
External Cost and Costless Negotiation

• Costs
• Cost to Ted of stopping playing 150/month
• Cost to Bill of tolerating the noise 80/month
• So the least costly solution is for Bill to put
  up with the noise (since 80 lt 150).
• Since this cost is less than the 100 per month
  gain, they should live together.

38
The Gain in Surplus from Shared Living
Arrangements
39
External Cost and Costless Negotiation

• What is the largest rent Bill would be willing to
  pay if the two were to live together?
• If Bill were to live alone, he would pay 300/mo
  and suffer no trumpet noise.
• Since the noise costs him 80/mo, the most he
  would be willing to pay for the shared apartment
  is 300 - 80 220.

40
External Cost and Costless Negotiation

• How should Ted and Bill split the 500/mo rent if
  they agree that each should benefit equally from
  living together?
• Their total gain from living together is 100 -
  80 20/mo.
• If Ted pays 290/mo and Bill pays 210/mo, each
  will be 10/mo better off than if he were to live
  alone.

41
External Cost and Costless Negotiation

• When there is no barrier to negotiation (
  costless negotiation)
• Efficient solutions to externalities can be
  found.
• The adjustment to the externality is usually done
  by the party with the lowest cost.

42
Legal Remedies for Externalities

• However, it is often impractical to negotiate
  solutions to the problems created by
  externalities.
• Example hospital patients are unable to
  negotiate with passing motorists about not
  blowing their horns.

43
Legal Remedies for Externalities

• When negotiation is costly
• Laws may be used to correct for externalities.
• The burden of the law can be placed on those who
  have the lowest cost.

44
Legal Remedies for Externalities

• Example
• Not blowing his horn is a cost to the motorist,
  but a benefit to the patient.
• Because peace and quiet is especially valuable
  for hospital patients, the law prohibits horn
  blowing in the vicinity of hospitals.

45
The Right to an Unobstructed View

• Lehman owns a house overlooking a lake, from
  which he enjoys a commanding sunset view.

46
The Right to an Unobstructed View

• Martin purchases the property below Lehmans and
  is considering which of two houses to build
• a one-storey house that would leave Lehmans view
  intact
• or a two-storey design that would completely
  block Lehmans view.

47
The Right to an Unobstructed View

• Suppose
• The gain to Lehman from an unobstructed view is
  100,
• The gain to Martin from a one-storey house is
  200,
• The gain to Martin from a two-storey house is
  280.

48
The Right to an Unobstructed View

• If the laws of property let people build houses
  of any height they chose, and if negotiation
  between property owners were costless, which of
  the two houses would Martin build?

49
The Right to an Unobstructed View

• Value of view to Lehman 100
• Value of second storey to Martin 280 200 80
• The increase in Martins gain from having the
  taller house is 80, which is 20 less than the
  cost to Lehman from the loss of his view.

50
The Right to an Unobstructed View

• The efficient outcome is thus for Martin to build
  the one-storey house.
• That is exactly what would happen if the two
  parties could negotiate costlessly.

51
The Right to an Unobstructed View

• Rather than see Martin build the taller house, it
  will be in Lehmans interest to compensate Martin
  for choosing the shorter version.
• To do so, he will have to give Martin at least
  80.
• The most Lehman would be willing to pay is 100,
  since that is all the view is worth to him.
• For some payment P, where 80 ? P ? 100, Lehman
  will get to keep his view.

52
The Right to an Unobstructed View

• Suppose, however, that negotiations between the
  two parties were impractical.
• Martin would then go ahead with the two-storey
  house, since that is the version he values most.
  
• By comparison with the one-storey design, Martin
  would gain 80, but Lehman would lose 100.

53
The Right to an Unobstructed View

• The optimal structure of property rights in this
  particular example would be to prohibit any
  building that blocks a neighbors view.

54
The Right to an Unobstructed View

• If the valuations assigned by the parties were
  different, a different conclusion might follow.
• If Martin valued the two-storey house at 300 and
  Lehman valued the view at only 80, the optimal
  structure of property rights would be to allow
  people to build to whatever height they chose.

55
Modified Coase Theorem

• The optimal structure of property rights is the
  one that places the burden of adjustment (either
  the loss of a view or the loss of a preferred
  building design) on the party that can accomplish
  it at the lowest cost.

56
Modified Coase Theorem

• As a practical matter, the laws of property often
  embody this principle.
• Even in cities that have no special view to
  protect at all, zoning laws generally limit the
  fraction of the lot that can be occupied by
  manmade structures.
• Most people value access to at least some
  sunlight, and ordinances of this sort make it
  possible for them to get it.

57
Solutions to Externality

• Private solutions
• Coase theorem
• Assumption no transaction costs, clearly
  assigned property rights
• Efficient allocation regardless of assignment of
  property rights
• Modified Coase Theorem
• Assign property rights to the party with the
  least cost of adjustment
• Public solutions?

58
Public Policies Toward Pollution

• When externalities are significant and private
  solutions are not found, the government may
  attempt to solve the problem through . . .
• command-and-control policies.
• market-based policies.

59
Public Policies Toward Pollution

• Command-and-Control Policies
• Usually take the form of regulations
• Forbid certain behaviors.
• Require certain behaviors.
• Examples
• Requirements that all students be immunized.
• Stipulations on pollution emission levels set by
  the Environmental Protection Agency (EPA).

60
Public Policies Toward Pollution

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

61
Application The Economics of Pollution

• Pollution is a bad thing... Yet most pollution is
  a side effect of activities that provide us with
  good things
• Our air is polluted by power plants generating
  the electricity that lights our cities, and our
  rivers are damaged by fertilizer runoff from
  farms that grow our food
• Then, how much pollution should a society have?

62
Public Policies Toward Pollution

• Regulation versus Pigovian Tax
• If the EPA decides it wants to reduce the amount
  of pollution coming from a specific plant, the
  EPA 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).

63
Public Policies Toward Pollution

• Environmental standards rules that protect the
  environment by specifying actions by producers
  and consumers.
• Emission tax a tax that depends on the amount of
  pollution a firm produces.
• Tradable emissions permits licenses to emit
  limited quantities of pollutants that can be
  bought and sold by polluters.

64
Public Policies Toward Pollution

• Market-Based Policies
• Tradable pollution permits allow the voluntary
  transfer 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.

65
Taxing Negative Externalities

• Two firms, X and Y, have access to five different
  production processes each one has a different
  cost and gives off a different amount of
  pollution.

66
Taxing Negative Externalities

• If pollution is unregulated, and negotiation
  between the firms and their victims is
  impossible
• Each firm will use A, the least costly of the
  five processes.
• Each will emit 4 tons of pollution per day, for a
  total pollution of 8 tons/day.

67
Taxing Negative Externalities

• The City Council wants to cut smoke emissions by
  half and is considering two options
• Policy A Require each firm to curtail its
  emissions by half.
• Policy B Set a tax of T on each ton of smoke
  emitted each day.

68
Taxing Negative Externalities

• How large would T have to be in order to curtail
  emissions by half?
• How would the total cost to society compare under
  the two alternatives?

69
Taxing Negative Externalities

• Policy A
• If each firm is required to cut pollution by
  half, each must switch from process A to process
  C.

70
Taxing Negative Externalities

• Costs of the switch
• For firm X 700/day - 200/day 500/day.
• For firm Y 140/day - 50/day 90/day,
• Total cost for the two firms 590/day.

71
Taxing Negative Externalities

• Policy B How will each firm respond to a tax of
  T per ton of pollution?
• Switching to the next process will cut pollution
  by 1 ton per day and save tax of T/day.
• If the cost of switching to the next process is
  less than or equal to T, the firm will switch,
  otherwise not.

72
Taxing Negative Externalities

• If T 50/ton
• Firm X would stick with process A.
• Firm Y will switch to process B.

73
Taxing Negative Externalities

• If T 91/ton
• Firm X will switch to process B.
• Firm Y will switch to process D.

74
Taxing Negative Externalities

• Costs of the switch
• For firm X 290/day-200/day 90/day.
• For firm Y 230/day-50/day 180/day.
• Total cost for both firms is thus only 270/day,
  or 320/day less than the cost of having each
  firm cut pollution by half.

75
Taxing Negative Externalities

• The direct regulatory approach of requiring each
  firm to cut by half took no account of the fact
  that firm Y can reduce pollution much more
  cheaply than firm X can.
• The advantage of the tax approach is that it
  concentrates pollution reduction in the hands of
  the firms that can accomplish it in the least
  costly way.

76
Taxing a Negative Externality
Private equilibrium without pollution tax
Private equilibrium with pollution tax
Social MC Private MC XC
Private MC Tax
XC
Tax
P(S)
P(S)
Price
Price
Private MC
Private MC
P(P)
P(P)
D
D
P
S
Social optimum
Private equilibrium
Quantity
Quantity
Note The optimal amount of negative
externalities is not zero
77
Pollution Permits

• Suppose now that the City Council issues
  pollution permits to the two firms, allowing them
  to generate 4 tons of smoke daily, in total.
• Will the pollution generated by the two firms
  change with the different allocation of permits?

78
Pollution Permits

• Suppose each firm is given permits to generate 2
  tons of smoke.

By moving from C to B, Firm X will generate 1
more ton of smoke but will save a cost of 410.
By moving from C to D, Firm Y will incur a cost
of 90. Negotiation will ensure the new
allocation (3 tons for firm X, and 1 ton for firm
Y).
79
Pollution Permits

• Tradable pollution permits allow the voluntary
  transfer 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.

80
The Tragedy of the Commons

• A common is an area that is owned by all
  members of a group or a society and is accessible
  by all.
• The key feature of common property is that it can
  be used by anyone, and most users use it without
  any thought about what their use will do to the
  possible use by other people.

81
The Tragedy of the Commons

• Common resources left to the free market suffer
  from overuse a user depletes the amount of the
  common resource available to others but does not
  take this cost into account when deciding how
  much to use the common resource.
• The tragedy of the commons describes situations
  in which valuable resources are destroyed because
  users are not charged for them.

82
The Tragedy of the Commons

• First introduced in 1833 by William Forster
  Lloyd, a political economist at Oxford
  University, looking at the recurring devastation
  of common ( not privately owned) pastures in
  England.

83
The Tragedy of the Commons

• Once a resource is being used at a rate near its
  sustainable capacity, any additional use will
  reduce its value to its current users.
• Thus they will increase their usage to maintain
  the value of the resource to them, resulting in a
  further deterioration in its value, and so on,
  until no value remains.

84
The Tragedy of the Commons

• A village has five residents, each of whom has
  accumulated savings of 100.
• Each villager has two investment options
• Buy government bond for 100 that pays 12
  interest per year.
• Buy a year-old steer for 100, send it onto the
  commons to graze, then sell it after one year.
• Investment decisions are individual and public.

85
The Tragedy of the Commons

• If each person decides individually how to
  invest, how many steers will be sent onto the
  commons?
• Will there be a socially optimal outcome?

86
The Tragedy of the Commons

• Private decision
• Opportunity cost of investing in steer 12
• Send steer if and only if price of 2-year-old
  steer is at least 112.
• Decision rule for socially optimal investment
• Send another steer only if the value of the herd
  increases by at least 12.

Income per steer
Marginal income
87
Private Decision
Act individually to maximize income

• Individual choice
• 4 steers 48
• 1 bond 12
• Village total income 12 4x12 60

88
Socially Optimal Herd Size
Income per steer (/year)
Total cattle Income (/year)
Marginal Income (/year)
Price per 2-year-old steer ()
Number of steers on the commons
1 120 20 20 20 2 116 16 32 12 3 114 14 42 10 4
112 12 48 6 5 110 10 50 2
Act individually to maximize income
Act collectively to maximize village income

• Socially optimal choice
• 2 steers 32
• 3 bonds 36
• Total Income 68

• Individual choice
• 4 steers 48
• 1 bonds 12
• Total Income 60

89
The Problem of Unpriced Resources

• The problem with private decisions is that no
  individual has any incentive to take into account
  that an extra steer will eat grass that otherwise
  would have been available to the steers already
  on the commons.
• When no one owns the commons, the opportunity
  cost of using it is not considered.

90
The Problem of Unpriced Resources

• When they operate alone, each grazer imposes an
  external cost on the others a negative
  externality by making the property less valuable
  ( the reduced return to every steer).

91
The Tragedy of the Commons

• The externality can be internalized by switching
  to group action
• The group of five changes the incentive structure
  from maximizing for each to maximizing for all.
• The marginal reward to the group is different
  from the marginal reward to the individuals.

92

• Examples of Tragedies of the Commons

Harvesting timber on public land

• Each tree cutter knows that a tree not harvested
  this year will be bigger, and hence more
  valuable, next year.
• But he also knows that if he doesnt cut the tree
  down this year, someone else will.

93

• Examples of Tragedies of the Commons

Harvesting whales in international waters

• Each individual whaler knows that harvesting an
  extra whale reduces the breeding population of
  whales and hence the size of future whale
  populations.
• But he also knows that any whale he fails to
  harvest today will just be taken by some other
  whaler.

94

• Examples of Tragedies of the Commons

Environmental pollution

• Each individual polluter has no incentive to take
  into account the cost his pollution imposes on
  others.

95
Going Back to Chapter 1

• Problem 4 (page 20)
• Once a week, Smith purchases a six-pack of cola
  and puts it in his refrigerator for his two
  children. He invariably discovers that all six
  cans are gone on the first day.
• Jones also purchases a six-pack of cola once a
  week for his two children, but unlike Smith, he
  tells them that each may drink no more than three
  cans.
• If the children use cost-benefit analysis each
  time they decide whether to drink a can of cola,
  explain why the cola lasts much longer at Jones
  house than at Smiths.

96
Going Back to Chapter 1

• At Smiths house, each child knows that the cost
  of not drinking a can of cola now is that it is
  likely to end up being drunk by his sibling.
• Each child has an incentive to consume rapidly to
  prevent the other from encroaching on his share.

97
Going Back to Chapter 1

• Jones, by contrast, has eliminated that incentive
  by making sure that neither child can drink more
  than half the cans.
• This step permits his children to consume at a
  slower, more enjoyable pace.

98
Defined Property Rights as a Solution to the
Tragedy of the Commons

• Characteristics of property rights
• Rights must be specified ( what and where the
  property is).
• Rights must be exclusive ( gives the property
  owner access to any rewards yielded by the
  property).
• Rights must be transferable ( can be bought and
  sold in a well-defined and operating market).
• Rights must be enforceable and enforced.

99
Defined Property Rights as a Solution to the
Tragedy of the Commons

• doesnt cut trees down
  too quickly on its own land.

100
Defined Property Rights as a Solution to the
Tragedy of the Commons
People dont dump toxic wastes into their own
swimming pools.
101
Regulations as a Solution to the Tragedy of the
Commons

• Private property removes the problem of the
  common.
• Regulations can do the same when private
  ownership is impractical
• Harvesting timber on remote public land
• Harvesting whales in international waters
• Controlling multinational environmental pollution

102
Regulations as a Solution to the Tragedy of the
Commons
Fishing licenses limit the amount of fish that
can be taken.
103
Regulations as a Solution to the Tragedy of the
Commons

• Mandatory recycling.

104
Regulations as a Solution to the Tragedy of the
Commons

• Laws regulate air and water pollutants.

105
Regulations as a Solution to the Tragedy of the
Commons

• Zoning laws limit the size and other features of
  buildings, signs, land-use patterns, etc.

106
Taxation as a Solution to the Tragedy of the
Commons

• Taxes also lead people to account for how their
  actions affect others.
• Example In the cattle-grazing economy, suppose
  there is now a 25 tax on income earned from
  cattle.
• If people decide individually between bonds and
  cattle, how many steers will be sent onto the
  commons?

107
Taxation as a Solution to the Tragedy of the
Commons
With a 25 tax on income from cattle, only 2
steers will be sent onto the commons, and this is
the socially optimal number.
Total income 3x12 2x12 8
68 (bonds) (cattle) (tax)
108
Positional Externalities

• Positional externalities occur when an increase
  in one persons performance reduces the expected
  reward of another in situations in which reward
  depends on relative performance.
• Frequent in activities where competition for
  position is very intense and the difference
  between first place and second place is well
  defined.

109
Positional Externalities

• When the payoff depends on relative performance,
  incentive to invest in performance activities
  will be excessive from a collective point of view.

110
Positional Externalities

• Example 24-hour grocery stores
• Strategy to close the latest to serve more
  customers.
• But at night, there are not so many customers

111
Payoff Matrix for 24-hour Opening
Supermarket A
Close at midnight
Close at 100am
Close at midnight
Supermarket B
Close at 100am
gt Dominant strategy for each yields the third
best outcome
112
Positional Externalities

• In such situations, the convenience of an
  all-night shopping option could be maintained at
  lower cost
• By limiting business hours,
• Or by permitting stores to limit hours, perhaps
  through an agreement whereby each store serves in
  turn as the only all-night grocery.

113
Positional Arms Races

• Positional externalities stimulate positional
  arms races ( series of mutually offsetting
  investments in performance enhancement).
• Examples
• Advertising.
• Use of illegal performance enhancing drugs in
  sport.
• Political campaign spending.

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Positional Arms Control Agreements

• An agreement in which contestants try to limit
  mutually offsetting investments in performance
  enhancements.
• Examples
• Campaign spending limits.
• Anti-doping measures.
• Social norms.

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End of ECON1001