Hi k9queen!
For a definition of each kind of externality, you might want to visit
the following link; it has great explanations of the various types of
externalities, along with very useful graphics.
Chapter Notes
http://www.lclark.edu/~bekar/Mankiw/ch10/notes.htm#aa4
These are the answers to your questions.
a) Examples of each externality.
Negative consumption externality:
- People who smoke cause a negative consumption externality, because
they affect negatively all the people near them through the smoke of
the cigarettes. Thus the social value of a cigarette is smaller than
the private value, because the individual that smokes does not take in
account the reduction in other's people utility (from their breathing
a more "polluted" air)
- Alcohol could also be a negative consumption externality, because if
someone drinks and then drives it might harm other people.
Positive consumption externality:
- Vaccines against contagious diseases cause a positive consumption
externality. A vaccine does not only has value to the person who takes
it; it affects positively all other people by reducing their chances
of being infected from the person who is taking the vaccine.
- Flowers for a garden can also cause a positive consumption
externality. If someone buys flowers for his garden, he's also
emebellishing the neighborhood; thus his neighbors derive utility from
his flowers. The flowers then create more social value than private
value.
Negative production externality:
- Usual examples of this kind of externality are industries that
pollute the air, and make the environment more noisy. The private cost
of producing a good is simply the raw materials, etc; but the social
cost is larger, because its production affects negatively people
living near the factory, through air pollution and noise.
Positive production externality:
- Again, the most usual example here is Research and Development. The
private cost a firm must face is the cost of paying to researchers,
devoting time to that task, etc. However, since technology eventually
becomes available for everyone else, the social cost is much lower,
because everybody else benefits from the firm that pays for the
research.
- Another example here is the one of the beekeeper and the florist who
are neighbors. The beekeeper causes a positive externality on the
florist, because his bees help polinize the florist's flowers, making
their reproduction easier. Also, the flowers help the bees produce
more honey: this is a case where two people cause mutual positive
externalities.
Some more examples can be found at the following pages:
Choice
http://www.andrew.cmu.edu/course/73-250spring/micro_files/classes/filesppt/class23.ppt
Lecture Notes
http://home.hanmir.com/~cj22c/mi12.htm
B-C) If we let the market work, and we assume perfect competition, it
is a well known result that the equilibrium quantity will be such that
the cost of producing the last unit of the good exactly equals the
value consumers give to it (in other words, where demand -value-
intersets supply -cost). However, the equilibrium will be at a point
in which *private* value equals *private* cost. Because neither the
consumers nor the produces internalize the fact that their consumption
(production) might be affecting others (either positively or
negatively). Therefore, since the social value and social cost are not
taken in account for the equilibrium quantity; the externalities will
make the equilibrium outcome suboptimal. Let's see an example.
COnsider the case of the polluting industry. We know that equilibrium
production will be such that private value equals private cost.
However, we've seen that the *social* cost is actually greater than
the private cost in this case. Therefore, it is more socially
efficient to produce less units than the equilibrium ones. A social
optimum requires that efficient quantity is such that the social value
is equal to the social cost. Since in this case the social cost is
greater than the private cost, we will have that at equilibrium the
social value is less than the social cost. It would be better then to
produce less units of the good. In particular, in each case we will
have:
Positive externality: the equilibrium quantity is less than the
socially optimal quantity.
Negative externality: the equilibrium quantity is more than the
socially optimal quantity
D) There are both public and private solutions to the problem of
externalities. These solutions are aimed at increasing the equilibrium
quantity when there is a positive externality; and decreasing the
equilibrium quantity when there is a negative externality. You can
find a list of possible solutions at the end of the first link I
provided. I will cite a few here:
"Moral suasion - People are taught that activities which create
externalities are "bad". Because of this moral pressure, the
externality may be eliminated. An example here is that people are
taught at an early age NOT to litter - therefore, most people don't
litter."
This can also be the case for smoking: in the last years, a lot of
emphasis has been put on how smokers harm the lives of non-smokers;
therefore a smoker might feel "guilty" about smoking in front of
others. Another case could be Greenpeace showing that some factory
pollutes the air or kills animals in order to produce its goods. This
might make the factory reduce the pollution levels (its managers
wouldn't want people to think that the factory is 'evil'), which would
eliminate the externality.
"Regulations - The government can choose to simply set rules for the
amount of pollution that apply to each individual in the market. This
can include the option for the government to simply outlaw some
activity (like dumping toxic waste into a river)."
"Pigovian taxes and subsidies - The government can allow people to
pollute, but the government will tax the polluters based on the amount
of pollution that people create. In this case, the government simply
puts a price on the right to pollute. Based on the demand for people
to pollute (a factor has a demand to pollute if it has a reason to
produce a product that causes pollution in the first place), this will
determine the quantity of pollution that will actually occur [...] A
Pigovian tax is appropriate any time there is a negative externality
(whether in production or consumption). If there is a positive
externality, the government could opt for a subsidy instead (a subsidy
is just the opposite of a tax - if you have to pay a tax in order to
do something, then the government pays YOU a subsidy every time you do
something)."
The graphics I've made are quite similar to the ones that can be found
in the first link. In any case, you can download them from:
http://www.angelfire.com/alt/elmarto
Google search strategy:
negative positive production consumption externality
://www.google.com/search?sourceid=navclient&ie=UTF-8&oe=UTF-8&q=negative+positive+production+consumption+externality
I hope this helps! If you have any doubt regarding my answer, please
request a clarification before rating it. Otherwise I await your
rating and final comments.
Best wishes!
elmarto |
