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“The Economic Way of Thinking”12th Edition

Chapter 10: Externalities and Conflic

ting Rights

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Chapter Outline Externalities, Negative and Positive Perfection is Unattainable Negotiation Reducing Externalities Through Adjudication The Problem of Radical Change Reducing Externalities Through Legislation Minimizing Costs

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Chapter Outline Another Approach: Taxing Emissions Licenses to Pollute Efficiency and Fairness Rights and the Social Problem of Pollution Traffic Congestion as an Externality

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Introduction Decision Making

Individuals choose their courses of action by weighing the expected marginal benefits of any decision against its expected marginal costs.

Benefits and costs for other people will not affect the decision unless the benefits and costs for others matter to the actor.

This is extremely important for the understanding of a wide range of social problems.

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Externalities, Negative and Positive Negative externalities （负外部性）

Or spillover costs （溢出成本） Or External Costs ( 外部成本 ) Costs not considered in decision making.

Examples Congestion （交通拥堵） caused by slow drivers

creates extra travel time. pollution

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Externalities, Negative and Positive Positive externalities （正外部性）

Benefits from an action that the decision maker does not take into account.

Examples Beautiful dress Delicious cake

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Perfection Is Unattainable This chapter focuses on negative externalitie

s. Negative externalities cannot be completely e

liminated because of transaction costs. Transaction costs

Are the costs of arranging contracts or transaction agreements between suppliers and demanders.

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Perfection is Unattainable Scenario

Motorcycle rider leaves home early in the morning. Imposes costs on neighbors still asleep.

Question Why don’t they pay him to push his cycle out of th

e neighborhood prior to starting it? Imposes costs on neighbors still asleep.

Answer Transaction costs may be very high!

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Perfection is Unattainable

Internalizing Externalities （将外部性内在化） When individuals take into account the externality

when making a decision.

Are monetary payments necessary to eliminate an externality? No!

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Perfection is Unattainable

In industrialized Societies Negative externalities multiply.

Civil people learn to ignore most of the negative externalities others inflict on them and try to be sensitive to the unintended costs that their own actions impose on others.

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Perfection is Unattainable

The first step to tackle the problems created by negative externalities it to cultivate the civic virtues of Empathy （体谅） Courtesy （礼貌） Humility （谦逊） Tolerance （容忍）

Almost all other procedures for dealing with externality problems presuppose these virtues to some extent.

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Negotiation （谈判，协商）

Negotiation is used to minimize social problems created by negative externalities.

Negotiation produces mutual gains from exchange.

Failure to negotiate creates high costs to others.

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Negotiation

Clearly defined property rights （明确定义的产权） provide the basis for negotiation.

Coase Theorem （科斯定理）：如果不存在交易费用，则产权的初始分配不影响资源的最终配置。

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Reducing Externalities Through Adjudication （裁定） Adjudication

A process for discovering who has which rights. Clarifies property rights.

Discovery or adjudication aims at maintaining the continuity of expectation.

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Reducing Externalities Through Adjudication Question

Which would happen if no one knew what to expect?

Answer No one knows what to do or what others will do.

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Reducing Externalities Through Adjudication Adjudication

Tries to avoid unexpected outcomes. Tries to support expectations that are most widely

and confidently held. Tries to maintain a continuity of expectations.

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The Problem of Radical Change Technology sometimes forces rapid changes.

New rules must be formed if negative externalities rapidly multiply.

Rising incomes may also demand new definitions of property rights.

Example: We now place a high value on clean air.

Clean air as a right. Requires new rules.

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Reducing Externalities Through Legislation （立法） The creation of new rules is legislation.

Legislation creats property rights Changing the rules of the game always raises the

question of fairness and compels major changes in behavior.

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Reducing Externalities Through Legislation The challenge for a society is to legislate in w

ays that avoid gross injustices Minimize the costs of achieving the objectives

Economic theory has more to say on the latter

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Minimizing Cost

Minimizing cost isn’t the only consideration when government officials are trying to achieve some objective.

Fairness is also a criterion for the evaluation of government decisions.

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Another Approach: Taxing Emissions （对排污征税） It is difficult at times for government agencies

to determine unit cost. Polluters have an incentive to exaggerate

their costs. To resolve this kind of information scarcity in

the least costly manner, the EPA could impose a tax per unit of emissions.

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Another Approach: Taxing Emissions Pollution is a spillover cost, a cost not borne

by its producer. If the per unit cost of a pollutant is set equal

to the spillover cost per unit, then the creator of the costs is made to bear them.

With the tax, less pollution will occur. Question

At what point would pollution cease?

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Another Approach: Taxing Emissions The task of the EPA is to compare the

marginal cost of reducing the emissions with the marginal benefits.

征税这种方式使得环保署可以通过在各种估计的污染成本下观察污染者所做出的反应来获取有关减轻污染的成本和收益的信息。 Learning by experimentation

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License （许可） to Pollute Pollution tax acquires the label （标签） of

“Licenses to pollute” （污染许可证） , which sounds like an official permission to commit crimes.

In fact, most pollution is: A cost Not a crime Should be “licensed” if the cost is less than the pr

operly calculated benefits associated with it.

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Efficiency and Fairness （效率与公平） Some people object to pollution taxes as unfa

ir place the whole burden of the tax on the poor, allowing the rich to foul the environment.

Choosing the parties, according to the least-cost solution, who must reduce their pollution based on the cost to them of doing so also seems arbitrary and unjust to many people.

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Efficiency and Fairness

It must be shown that the efficient solution can be achieved while settling the fairness issue in different ways. We don’t necessarily commit ourselves to place th

e costs on any particular parties when selecting the most efficient solution.

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Efficiency and Fairness Pollution reduction is a lot like any other usef

ul activity in that

some are more efficient at it than others.

We gain by having additional clean air produced by those with a comparative advantage at the job.

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Efficiency and Fairness

Comparative advantages are exploited through exchange.

So, the tax approach is in general superior to an approach that assigns physical restrictions to particular firms.

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Rights and Social Problem of Pollution Pollution is a major social and political concer

n because people disagree about relevant rights disagreement of these sorts can be extremely diffi

cult to resolve.

The economic way of thinking suggests a few principles that might be of considerable help:

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Rights and Social Problem of Pollution Demand for any good

is never completely inelastic,including clean air.

Control should be avoided People should have much freedom to choosing th

eir own ways of adapting.

The importance of stable property rights Transaction costs go down and effective cooperati

on increases.

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Traffic Congestion as an Externality （作为一种外部性的交通拥堵） Traffic congestion

Negative externality A cost generated by people who don’t take it into

account when making their decisions They take into account only the costs others drive

rs create

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Traffic Congestion as an Externality If motorists had to pay marginal congestion c

ost （边际拥堵成本） They drive only when benefits exceeded costs

How can externalities be internalized? congestion pricing ( 对拥堵定价 ) People often call it tolls （通行费，过路费） , are

very hostile to that idea.

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Traffic Congestion as an Externality Tolls vs. Gasoline Taxes （燃油税）

Gasoline Taxes For road construction Not for use

Tolls For use of road

It is the ignored cost of using roads that generates the congestion about which everyone complains. If fees paid based on the costs our driving impose

s on others, congestion diminishs.

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Once Over Lightly

Spillover Costs = Externalities Transaction Costs prevent negotiations. Negotiation used to secure cooperation. Clearly defined property rights ease negotiati

ons. Some pollution reduction activity is more effici

ent than others.