Tag Info

Accepted

Is it right to derive social marginal benefit by adding individual prices instead of quantities?

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. ...
• 8,519

Is the use/consumption of natural resources considered an externality per se?

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 ...
• 56.8k

Externalities, Pigouvian Taxes and Wikipedia

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 ...
• 56.8k
Accepted

Relationship between the Tragedy of the Commons and negative externalities?

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 ...
• 56.8k
Accepted

Pareto optimality with externalities

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 ...
• 231
Accepted

Understanding an article in the BMJ about the sugar tax

A little background. The paper relates to a tax (known as the Soft Drinks Industry Levy) introduced by the UK in 2018 on some soft drinks, levied on manufacturers (not consumers), with the aim, ...
• 8,519
Accepted

Pigouvian tax with general utility function

The first order condition for individual $a$ when the price of $y$ equals $p_y(1+t)$ is given by:  \frac{\partial u_a}{\partial y_a} = p_y(1+t) \left(\frac{1}{p_x} \frac{\partial u_a}{\partial x_a} \...
• 12.2k

Positive externalities of cars - free seats on public transport

In order to answer this question we first have to properly and rigorously define externality. Externalities are often vaguely defined as any effects on third parties but the correct definition of ...
• 56.8k
Accepted

How can a free market be operated in a way that significant social and environmental costs are intrinsically covered?

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. ...
• 8,168

Externality and Output

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 ...
• 56.8k

Externality and Output

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 ...
• 8,519
Accepted

Who pays externalities?

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 ...
• 8,168
Accepted

Understanding at a quote about externalities in law and economics

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 ...
• 8,519
Accepted

Negative consumer externality vs demerit good - what's the difference?

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 ...
• 29.2k
Accepted

What are the current economic theories of product advertising?

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 ...
• 16.9k
Accepted

Optimal Price and Quantity of Externality

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 ...
• 15.4k

Optimal Price and Quantity of Externality

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 ...
• 6,900

Positive externalities of cars - free seats on public transport

Effects that follow from rivalry are usually not considered to be economic externalities. From Wikipedia: In economics, a good is said to be rivalrous or a rival if its consumption by one consumer ...
• 29.2k

Should firecrackers which disturb neighbours be a production externality or consumption externality?

You are correct: in the circumstances described the disturbance to neighbours constitutes a negative consumption externality. I have tried to imagine why someone might think the externality is on the ...
• 8,519

Are risk-costs a form of external costs?

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 ...
• 8,168
Accepted

Externalities - First order conditions

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 \$\...

Why does the European Union give subsidies to farmers?

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 ...
• 1,391

Why does the European Union give subsidies to farmers?

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. ...
• 8,168

Providing subsidies affects Marginal Private cost but not Marginal Social Cost?

The amount of external cost is determined by the level of production in this framework. If the producers receive a subsidy the MPC shift to the right as you point out. That also means that for each ...
• 2,373
Accepted

(Microeconomics) How to classify Public Goods and Common Resources in Externalities?

First let's clarify some terminology: I assume that with "common resources" you mean goods that are non-excludable but rivalrous. The term that applies in those cases is open access. In common ...
• 2,373