# Tag Info

## Hot answers tagged externalities

10

I have to intervene to say that market failure and externality are not the same thing. So I do not think it is at all correct to define market failure as when "the production or consumption of a good or service causes additional positive or negative externalities on a third party not involved in the economic activity". Externalities are but one example ...

7

While advertising can be zero sum, here are two additional dimensions you might want to consider. Billboards, like other forms of advertising, can inform. In this way Ford can talk about their new 8 seat minivan while GM talks about the more fuel efficient engine of their latest model. This can result in happier customers who value their product better and ...

6

Vertical summation of the individual marginal benefit curves is the correct way to find social marginal benefit if the camera system, so far as the two stores are concerned, is a public good. Horizontal summation is the way to find total market demand for a private good. A good is a public good if it satisfies two conditions. One is non-excludability: that ...

5

I feel like I do not understand the exact meaning behind the notion of the Pareto optimality. It's not you. There are different senses of the phrase "Pareto Optimal," and you have to figure out from context which one is being used. The dictionary definition of Pareto Optimal is something like "An allocation from which any feasible change which makes any ...

5

The Pigovian taxes are non-distortionary. For example imagine situation where government optimal spending is 100e and before Pigovian tax all 100e was raised through income tax which creates distortions on Labour market. Let’s say that after imposing Pigovian tax government gets additional 30e. Now since government needs only 100e for its optimal spending it ...

5

Use or consumption of natural resources is not in mainstream economics considered as an externality per se. First of all the quote from Mankiw is probably from undergraduate textbook and taken out of context as it is incomplete. For example according to Economics by Mankiw and Taylor (2014) 3rd ed the externality is defined as: the cost or benefit of ...

4

An aspect of the matter could be described as follows: We want prompt replacement of (existing) fixed capital because, I guess, it creates currently "unacceptable" levels of negative externalities, and we know better than to think that through the pricing of the externalities we will be able to reverse the damages, and all swell. From this point of ...

4

To answer your other question of what properly defines market failure: The market fails when the socially desirable outcome is not achieved through the market. Since the market decisions are made based on cost-benefit analysis, when social (net) cost/benefit = private (net) cost/benefit then private actors in a market will make the socially optimal decision....

4

As far as we can tell, no, there is no way to do it using only a free market. Coase postulated that within a free market, agents would negotiate private contracts to internalise the externalities. In reality, this didn't happen. It turned out that humans aren't perfectly informed hyper-rational beings. And as Coase himself had inferred, the transaction ...

4

The reason why it boosts supply is that the costs are not born by produces. For example, since you can’t own fresh air due to lack of property rights (tragedy of the commons) firms don’t need to pay for using up the clean air by pollution and hence it does not enter their cost functions. Recall decrease in costs shifts supply right as at lower cost firms ...

4

In principle in both positive and negative externality scenario government could just set price to the socially efficient price. However, outside of static textbook example this is non-starter. The socially efficient price even in presence of externalities (positive or negative) is not constant and it will fluctuate across time. Hence government would have ...

4

For a government to address a positive externality by setting the price of a good to its socially efficient price would raise several difficulties. The diagram below relates to the case of a good subject to a positive production externality so that marginal social cost MSC is less than marginal private cost MPC (but no consumption externality, so marginal ...

3

If negative externalities are priced into the market via a pigouvian tax, then those responsible for the negative externalities pay. As a whole, the public is better off. Firstly because the market will now move to a more efficient situation, and the amount of negative externality will decrease (assuming something other than perfect inelasticity). And ...

3

In general, yes it's an externality: it's a cost borne by others. How do we know it's a cost with real economic value? Because in general, properties with good light and better views tend to attract higher purchase prices and higher market rents. And there's a difference between "view/light might be obscured some time in the future" versus "they are ...

3

My conclusion based on reading his paper is that the utility function of an individual or society can't be of the CRRA form presented in the paper. That would indeed lead to scenarios where you could not get out of the bed in the morning, as minimizing the tiniest probability of an enormous risk would warrant infinite sum of money. I will attempt to explain ...

3

You don't give the source of the quote, but presumably what is meant is this. Whether X's production or consumption of a good affects Y (in a physical way such as smoke from X's factory or noise from X's playing loud music, not merely through the workings of the price system) is a matter of fact. On the other hand, whether X is required (assuming a ...

3

Demerit goods are goods where it is agreed by society that consumption is harmful for the consumer yet it is still consumed due to bounded rationality or because you disagree with society while negative consumer externalities occur when actions of a consumer is harmful for society. Goods that are demerit but may not have negative consumer externality: Any ...

3

There is a vast literature in both economics and marketing on advertising. Some highlights relevant to your specific question: A classic paper (Grossman and Shapiro 1984) looks at competitive advertising and indeed finds that advertisers tend to send too many ads. Intuitively, some customers attracted by an ad aren't new demand, but rather simply stolen ...

3

There are two sorts of network effects a network good might have. It might have consumption externalities (such as with traffic) or it might have positive network externalities (such as with operating systems). The latter case is the case that your link discusses. I don't see a discussion of perfect competition in your link, but if you imagine a model in ...

3

A negative externality arises when the private net marginal benefit (i.e. the marginal benefit minus the marginal cost) of an activity exceeds the net social benefit. In such cases, the self-interested private decision maker will increase their participation in the activity even though it is socially inefficient for them to do so. A positive externality ...

3

Your steps look correct. There is one small typo in the first $\frac{\partial \mathcal L}{\partial h}$: the term $-4h(h-10)$ should have been $-4(h-10)$. The results also look reasonable: Regardless of who makes the offer, the Pareto optimal level of $h$ is produced. Given how the bargaining procedures are structured, whoever gets to make the offer gets to ...

3

Given that you already know the welfare maximizing level $h=5$ from your previous question, another approach would be to just consider that any optimal take-it-or-leave-it offer can be divided into two steps: First, maximize total surplus by setting $h=5$. Second, extract all surplus by maximizing the price subject to the other's participation constraint. ...

2

This should probably be a comment, but it's too long so I am posting it as an answer. I'm not sure I necessarily agree with "[A Pigouvian tax] is a fixed unit price, which cannot be efficient if the damage costs are highly non-linear." But I do definitely agree with the fact that non-linearity causes practical problems for a Pigovian implementation, as I ...

2

In the particular case of nuclear power plants, yes, the risk cost can be considered as a negative externality. That's because nuclear power plant operators are explicitly limited by law in their liability for third-party costs in the event of damages to those third parties. The third-party risk they present could run into trillions (\$/€): at Fukushima, ... 2 To make sure it's completely explicit: superscripts below are indices referring to either firm$1$or firm$2$. The choice variables in this problem are$\mathbf{q}^2$and$\beta$. Notice that$\mathbf{q}^2$is a vector of$n$quantities. That is to say,$\mathbf{q}^2=\left(q_1^2,q_2^2,\ldots,q_n^2\right)$.$(13.9)\$ is just the derivative of the objective ...

2

The governments want to ensure that there is enough food for their people even if international food trade breaks down (for example due to trade war, war, or famine). A secondary objective is that they want low food prices to make food affordable to people with low/medium income. Politicians that drive up food prices for the masses are less likely to get ...

2

Markets are extremely poor at pricing events that have very low probability and catastrophic impacts. In part because we're very bad at estimating low-probability events: by definition, they're rare. And in part because the catastrophic impacts fall on pretty much all the population, so any single purchase has very widely-spread potential negative ...

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