Eksternalitas Dan Barang Publik

Eksternalitas dan
Barang Publik
Topics to be Discussed
 Externalities
 Ways of Correcting Market Failure
 Externalities and Property Rights
 Common Property Resources
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Topics to be Discussed
 Public Goods
 Private Preferences for Public Goods

Externalities
 Negative
– Action by one party imposes a cost
on another party
 Positive
– Action by one party benefits
another party

External Cost
 Scenario
– Steel plant dumping waste in a
river
– The entire steel market effluent can
be reduced by lowering output
(fixed proportions production
function)

External Cost
 Scenario
– Marginal External Cost (MEC) is
the cost imposed on fishermen
downstream for each level of
production.
– Marginal Social Cost (MSC) is MC
plus MEC.

External Costs
When there are negative The differences is The profit maximizing firm
externalities, the marginal the marginal external produces at q1 while the
social cost MSC is higher cost MEC. efficient output level is q*.
than the marginal cost.
Price MSC Price
MC MSCI
S = MCI
The industry competitive
output is Q1 while the efficient Aggregate
level is Q*. social cost of
P* negative
externality
P1 P1
MECI
MEC
D
q* q1 Firm output Q* Q1 Industry output

External Cost
 Negative Externalities encourage
inefficient firms to remain in the
industry and create excessive
production in the long run.

Externalities
 Positive Externalities and
Inefficiency
– Externalities can also result in too
little production, as can be shown
in an example of home repair and
landscaping.

External Benefits
Value When there are positive
MSB externalities (the benefits
of repairs to neighbors),
A self-interested home owner
marginal social benefits
invests q1 in repairs. The
MSB are higher than
marginal benefits D. efficient level of repairs
q* is higher. The higher price
D P1 discourages repair.
P1 MC
P*
Is research and development

MEB discouraged by positive
externalities?
q1 q* Repair Level

Ways of Correcting Market Failure
 Assumption: The market failure is
pollution
– Fixed-proportion production
technology
 Must reduce output to reduce
emissions
 Use an output tax to reduce output
– Input substitution possible by altering
technology

The Efficient Level of Emissions
Assume:
1) Competitive market
2) Output and emissions decisions are independent
Dollars
3) Profit maximizing output chosen
per unit
of Emissions MSC
6
At Eo the marginal
Why is this more efficient cost of abating emissions
than zero emissions? is greater than the
marginal social cost.
4
At E1 the marginal
social cost is greater
than the marginal benefit.
The efficient level of

2 emissions is 12 (E*) where
MCA = MSC.
MCA
E0 E* E1
0 2 4 6 8 10 12 14 16 18 20 22 24 26
Level of Emissions
 Options for Reducing Emissions to E*
– Emission Standard
 Set a legal limit on emissions at E*
(12)
 Enforced by monetary and criminal
penalties
 Increasesthe cost of production and
the threshold price to enter the
industry

Standards and Fees
Dollars
per unit
of Emissions MSC
Standard
Fee
3
MCA
E*
12 Level of Emissions
 Options for Reducing Emissions to
E*
– Emissions Fee
 Chargelevied on each unit of

emission

Standards and Fees
Dollars
per unit
of Emissions MSC
Cost is less than the

fee if emissions were
Fee not reduced.
Total Fee Total MCA

of AbatementE* Abatement Cost
12
Level of Emissions
 Standards Versus Fees
– Assumptions
 Policymakers have asymmetric

information
 Administrativecosts require the
same fee or standard for all firms

The Case for Fees The impact of a standard of
abatement of 7 for both firms
Fee per is illustrated.
Unit of MCA1 Not efficient because
MCA2 < MCA1.
Emissions MCA2
If a fee of $3 was imposed
6 Firm 1 emissions would fall
The cost minimizing solution by 6 to 8. Firm 2 emissions
would be an abatement of 6 would fall by 8 to 6.
5 MCA1 = MCA2: efficient solution.
for firm 1 and 8 for firm 2 and
MCA1= MCA2 = $3.
4
3.75
3
Firm 1’s Increased
2.50 Abatement Costs
2 Firm 2’s Reduced
Abatement
Costs
1
Level of
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Emissions
 Advantages of Fees
– When equal standards must be
used, fees achieve the same
emission abatement at lower cost.
– Fees create an incentive to install
equipment that would reduce
emissions further.

The Case for Standards Based on incomplete
Fee per C information fee is $7
Unit of 16 (12.5% reduction).
Marginal
Emissions Emission increases to 11.
Social
14 Cost
ABC is the increase
12 in social cost less the
E
decrease in abatement
10 cost.
A
D
8 B Based on incomplete
information standard is 9
(12.5% decrease).
6 ADE < ABC
4 Marginal Cost
of Abatement
2
0 2 4 6 8 10 12 14 16 Level of Emissions
 Summary: Fees vs. Standards
– Standards are preferred when MSC
is steep and MCA is flat.
– Standards (incomplete
information) yield more certainty
on emission levels and less
certainty on the cost of abatement.

 Summary: Fees vs. Standards
– Fees have certainty on cost and
uncertainty on emissions.
– Preferred policy depends on the
nature of uncertainty and the
slopes of the cost curves.

 Transferable Emissions Permits
– Permits help develop a competitive
market for externalities.
 Agency determines the level of
emissions and number of permits
 Permits are marketable
 High cost firm will purchase permits
from low cost firms

 Question
– What factors could limit the
efficiency of this approach?

The Costs and Benefits
of Reduced Sulfur Dioxide Emissions
 Cost of Reducing Emissions

– Conversion to natural gas from
coal and oil
– Emission control equipment

The Costs and Benefits
of Reduced Sulfur Dioxide Emissions
 Benefits of Reducing Emissions

– Health
– Reduction in corrosion
– Aesthetic

Sulfur Dioxide Emissions Reductions
Dollars
per
unit of
60
reduction Observations
•MAC = MSC @ .0275
•.0275 is slightly below actual emission level
•Economic efficiency improved
40
Marginal Social Cost
20
Marginal Abatement Cost

Sulfur dioxide
0 0.02 0.04 0.06 0.08 concentration (ppm)

Emissions Trading and Clean Air
 Bubbles
– Firm can adjust pollution controls for
individual sources of pollutants as long
as a total pollutant limit is not exceeded.
 Offsets
– New emissions must be offset by
reducing existing emissions
 2000 offsets since 1979

 Cost of achieving an 85% reduction in
hydrocarbon emissions for DuPont
– Three Options
 85% reduction at each source plant
(total cost = $105.7 million)
 85% reduction at each plant with internal
trading (total cost = $42.6 million)
 85%reduction at all plants with internal
and external trading
(total cost = $14.6 million)

 1990 Clean Air Act
– Since 1990, the cost of the permits
has fallen from an expected $300 to
below $100.
 Causes of the drop in permit prices
– More efficient abatement techniques
– Price of low sulfur coal has fallen

 Recycling
– Households can dispose of glass
and other garbage at very low cost.
– The low cost of disposal creates a
divergence between the private
and the social cost of disposal.

The Efficient Amount of Recycling
Cost Without market intervention With a refundable deposit,

the level of scrap will be at m1 MC increases and
and m1 > m*. MC = MSC = MCR.
MSC
MCR
MC + per unit refund

MC
0 4 m* m1 8 12 Scrap
Refundable Deposits
The supply of glass is Sr With refunds Sr increases
the sum of the supply to S’r and S increases to S’.
$ of virgin glass (Sr) and
the supply of recycled S’r
glass (Sr).
Sv
Without refunds the
price of glass is P and
Sr is M1.
S
S’
P
Price falls to P’ and
P’ the amount of
recycled glass
increases to M*.
M1 M* Amount of Glass
Externalities and Property Rights
 Property Rights
– Legal rules describing what people
or firms may do with their property
– For example
 Ifresidents downstream owned

the river (clean water) they
control upstream emissions.

 Bargaining and Economic Efficiency

– Economic efficiency can be
achieved without government
intervention when the externality
affects relatively few parties and
when property rights are well
specified.

Profits Under Alternative
Emissions Choices (Daily)
Factory’s Fishermen’s Total

Profit Profit Profit
No filter, not treatment plant 500 100 600
Filter, no treatment plant 300 500 800
No filter, treatment plant 500 200 700
Filter, treatment plant 300 300 600

 Assumptions
– Factory pays for the filter
– Fishermen pay for the treatment
plant
 Efficient Solution
– Buy the filter and do not build the
plant

Bargaining with
Alternative Property Rights
Right to Dump Right to Clean Water
No Cooperation
Profit of factory $500 $300
Profit of fishermen $200 $500
Cooperation
Profit of factory $550 $300
Profit of fishermen $250 $500

 Conclusion: Coase Theorem

– When parties can bargain without
cost and to their mutual advantage,
the resulting outcome will be
efficient, regardless of how the
property rights are specified.

 Costly Bargaining --- The Role of

Strategic Behavior
– Bargaining requires clearly defined
rules and property rights.

 A Legal Solution --- Suing for Damages

– Fishermen have the right to clean
water
– Factory has two options
 No filter, pay damages
– Profit = $100 ($500 - $400)
 Filter, no damages
– Profit = $300 ($500 - $200)

 A Legal Solution --- Suing for Damages

– Factory has the right to emit effluent
– Fishermen have three options
 Put in treatment plant

– Profit = $200
 Filter and pay damages

– Profit = $300 ($500 - $200)
 No plant, no filter
– Profit = $100

 Conclusion
– A suit for damages results in an
efficient outcome.
 Question
– How would imperfect information
impact the outcome?

The Coase Theorem at Work
 Negotiating an Efficient Solution
– 1987 --- New York garbage spill (200
tons) littered the New Jersey
beaches
 The potential cost of litigation
resulted in a solution that was
mutually beneficial to both
parties.

Common Property Resources
 Common Property Resource
– Everyone has free access.
– Likely to be overutilized
– Examples
 Air and water

 Fish and animal populations
 Minerals

Without control the number
of fish/month is FC where
Benefits, PC = MB.
However, private costs
Costs underestimate true cost.
($ per Marginal Social Cost
The efficient level of
fish) fish/month is F* where
MSC = MB (D)
Private Cost
Demand
F* FC Fish per Month

 Solution
– Private ownership
 Question
– When would private ownership be
impractical?

Crawfish Fishing in Lousiana
 Finding the Efficient Crawfish Catch
– F = crawfish catch in millions of
pounds/yr
– C = cost in dollars/pound

 Demand
– C = 0.401 = 0.0064F
 MSC
– C = -5.645 + 0.6509F
 PC
– C = -0.357 + 0.0573F

 Efficient Catch
– 9.2 million pounds
– D = MSC

Crawfish as a Common
Property Resource
C
Cost Marginal Social Cost
(dollars/pound)
2.10
Private Cost
0.325
Demand
Crawfish Catch
9.2 11.9 (millions of pounds)

Public Goods
 Question
– When should government replace
firms as the producer of goods and
services?

Public Goods
 Public Good Characteristics
– Nonrival
 Forany given level of production the

marginal cost of providing it to an
additional consumer is zero.
– Nonexclusive
 People
cannot be excluded from
consuming the good.

Public Goods
 Not all government produced goods
are public goods
– Some are rival and nonexclusive
 Education
 Parks

Efficient Public Good Provision
Benefits When a good is nonrival, the social marginal
(dollars) benefit of consumption (D) , is determined by
vertically summing the individual demand
$7.00 curves for the good.
$5.50 Marginal Cost
D2
$4.00 Efficient output occurs
where MC = MB at 2
units of output. MB is
$1.50 + $4.00 or $5.50.
D
$1.50
D1
0 1 2 3 4 5 6 7 8 9 10 Output

Public Goods
 Public Goods and Market Failure
– How much national defense did
you consume last week?

Public Goods
 Free Riders
– There is no way to provide some
goods and services without
benefiting everyone.
– Households do not have the incentive
to pay what the item is worth to them.
– Free riders understate the value of a
good or service so that they can
enjoy its benefit without paying for it.

Public Goods
 Establishing a mosquito abatement
company
– How do you measure output?
– Who do you charge?
– A mosquito meter?

The Demand for Clean Air
 Clean Air is a public good
– Nonexclusive and nonrival
 What is the price of clean air?

 Choosing where to live
– Study in Boston correlates
housing prices with the quality of
air and other characteristics of the
houses and their neighborhoods.

Dollars
High Income
3000
2500
Middle Income
2000
1500 Low Income
1000
500
Nitrogen Oxides
0 1 2 3 4 5 6 7 8 9 10 (pphm)

 Findings
– Amount people are willing to pay for clean air
increases substantially as pollution
increases.
– Higher income earners are willing to pay more
(the gap between the demand curves widen)
– National Academy of Sciences found that a
10% reduction in auto emissions yielded a
benefit of $2 billion---somewhat greater than
the cost.

Private Preferences for Public Goods
 Government production of a public
good is advantageous because the
government can assess taxes or fees
to pay for it.
 Determining how much of a public
good to provide when free riders
exist is difficult.

Determining the Level
of Educational Spending
Willingness
to pay
The efficient level of educational
$
spending is determined by summing the
willingness to pay for education for each
of three citizens.
AW
W1 W2 W3
Educational spending
$0 $600 $1200 $1800 $2400 per pupil

Determining the Level
of Educational Spending
Willingness
to pay
Will majority rule yield an efficient outcome?
$
•W1 will vote for $600
•W2 and W3 will vote for $1200
The median vote will always win in a majority
rule election.
AW
W1 W2 W3
Educational spending
$0 $600 $1200 $1800 $2400 per pupil

 Question
– Will the median voter selection
always be efficient?
 Answer
– If two of the three preferred $1200
there would be overinvestment.
– If two of the three preferred $600
there would be underinvestment.

 Majority rule is inefficient because it
weighs each citizen’s preference
equally---the efficient outcome
weighs each citizen’s vote by his or
her strength of preference.

Summary
 There is an externality when a producer or
a consumer affects the production or
consumption activities of others in a
manner that is not directly reflected in the
market.
 Pollution can be corrected by emission
standards, emissions fees, marketable
emissions permits, or by encouraging
recycling.

Summary
 Inefficiencies due to market failure
may be eliminated through private
bargaining among the affected parties.
 Common property resources are not
controlled by a single person and can
be used without a price being paid.

Summary
 Goods that private markets are not
likely to produce efficiently are either
nonrival or nonexclusive. Public
goods are both.
 A public good is provided efficiently
when the vertical sum of the individual
demands for the public good is equal
to the marginal cost of producing it.

Summary
 Under majority rule voting, the level
of spending provided will be that
preferred by the median voter---this
need not be the efficient outcome.

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Eksternalitas dan

nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com

nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com

nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com

nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com

nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com

nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com

nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com

nuhfil hanani : web site : www.nuhfil.com, email : nuhfil@yahoo.com

Is research and development

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The efficient level of

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 Chargelevied on each unit of

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Cost is less than the

Total Fee Total MCA

 Policymakers have asymmetric

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 Cost of Reducing Emissions

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 Benefits of Reducing Emissions

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Marginal Social Cost

Marginal Abatement Cost

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Cost Without market intervention With a refundable deposit,

MC + per unit refund

 Ifresidents downstream owned

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 Bargaining and Economic Efficiency

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Factory’s Fishermen’s Total

No filter, not treatment plant 500 100 600

Filter, no treatment plant 300 500 800

No filter, treatment plant 500 200 700

Filter, treatment plant 300 300 600

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Right to Dump Right to Clean Water

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 Conclusion: Coase Theorem

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 Costly Bargaining --- The Role of

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 A Legal Solution --- Suing for Damages

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 A Legal Solution --- Suing for Damages