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Chapter 17 - Externalities and public goods. This chapter presents the following content: Motivation, inefficiency of competition with externalities, allocation property rights to restore optimality, public goods. | Externalities and Public Goods Chapter 17 Copyright (c)2014 John Wiley & Sons, Inc. 1 1 Chapter Seventeen Overview Motivation Inefficiency of Competition with Externalities Allocation Property Rights to Restore Optimality The Coase Theorem Problems with the Coase Approach Other Methods to Restore Optimality – Standards and Fees Public Goods A Taxonomy Demand for Public Goods Free Riders and the Supply of Public Goods Chapter Seventeen Copyright (c)2014 John Wiley & Sons, Inc. 2 Chapter Seventeen Externalities Definition: If one agent's actions imposes costs on another party, the agent exerts a negative externality, while if the agent's actions have benefits for another party, the agent exerts a positive externality. Network externalities, snob effects Wind chimes When externalities are present, the competitive market may not attain the Pareto Efficient outcome. Copyright (c)2014 John Wiley & Sons, Inc. 3 Chapter Seventeen Inefficiency of Competition with Externalities Copyright . | Externalities and Public Goods Chapter 17 Copyright (c)2014 John Wiley & Sons, Inc. 1 1 Chapter Seventeen Overview Motivation Inefficiency of Competition with Externalities Allocation Property Rights to Restore Optimality The Coase Theorem Problems with the Coase Approach Other Methods to Restore Optimality – Standards and Fees Public Goods A Taxonomy Demand for Public Goods Free Riders and the Supply of Public Goods Chapter Seventeen Copyright (c)2014 John Wiley & Sons, Inc. 2 Chapter Seventeen Externalities Definition: If one agent's actions imposes costs on another party, the agent exerts a negative externality, while if the agent's actions have benefits for another party, the agent exerts a positive externality. Network externalities, snob effects Wind chimes When externalities are present, the competitive market may not attain the Pareto Efficient outcome. Copyright (c)2014 John Wiley & Sons, Inc. 3 Chapter Seventeen Inefficiency of Competition with Externalities Copyright (c)2014 John Wiley & Sons, Inc. 4 Chapter Seventeen Inefficiency of Competition with Externalities Private Social Change Optimum Consumers Surplus A+B+G +K A - B - C - K Private Producers Surplus E+ F+ R+H+N B+E+F+R+H+G B + G - N Externality Cost -R-H-N-G-K-M -R-H-G M+N+K Net Social Benefits A+B+E+F-M A+B+E+F M (consumer surplus + private producer surplus - cost of externality) Deadweight Loss M zero M Copyright (c)2014 John Wiley & Sons, Inc. 5 Chapter Seventeen Inefficiency of Competition with Externalities Copyright (c)2014 John Wiley & Sons, Inc. 6 Chapter Seventeen Inefficiency of Competition with Externalities Private Social Change Optimum Private Consumers Surplus B+E +F B+E+F+G+K+L G+K+L Producers Surplus G+R F+G+R+J+M F+J+M Externality Benefit A+H+J A+H+J+M+N+T M+N+T Government Cost from Subsidy zero -F-G-J-K-L-M-T -F-G-J-K-L-M-T Net Social Benefits A+B+E+F A+B+E+F+G+H M+N (consumer surplus + private producer +G+H+J+R +J+M+N+R surplus - cost of externality) Copyright (c)2014 John .
