PART II CHAPTER 5 Externalities: Problems and Solutions . . . . . . .

121
Externalities 5.1 Externality Theory . . . . . . . . . . . . . . . . . . . . . . . . . . 123
and Public Economics of Negative Production Externalities 123
Negative Consumption Externalities 126
Goods Application: The Externality of SUVs 127
Positive Externalities 128

5.2 Private-Sector Solutions to Negative Externalities . . . . . . . 130

The Solution 130
The Problems with Coasian Solutions 132

5.3 Public-Sector Remedies for Externalities . . . . . . . . . . . . . 134

Corrective Taxation 135
Subsidies 136
Regulation 137

5.4 Distinctions Between Price and Quantity Approaches

to Addressing Externalities . . . . . . . . . . . . . . . . . . . . . . . . 137
Basic Model 137
Price Regulation (Taxes) vs. Quantity Regulation in This Model 139
Multiple Plants with Different Reduction Costs 140
Uncertainty About Costs of Reduction 143

5.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146

Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146

Questions and Problems . . . . . . . . . . . . . . . . . . . . . . . . . . 147

Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

CHAPTER 6 Externalities in Action: Environmental and Health

Externalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
6.1 Acid Rain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
The Damage of Acid Rain 150
History of Acid Rain Regulation 151
Empirical Evidence: Estimating the Adverse Health Effects of Particulates 152
Has the Clean Air Act Been a Success? 154

6.2 Global Warming . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

Application: The Montreal Protocol 157
The Kyoto Treaty 158
Can Trading Make Kyoto More Cost-Effective? 158
What Does the Future Hold? 161
Application: Congress Takes on Global Warming 162