ECON 1201 Lecture Notes - Lecture 14: Pigovian Tax, Externality
ECON 1201 – Lecture 14 Notes – Solutions to Externalities and Intro to Public Goods
First study session on new stuff - April 9th at 5pm in Oak 401
Solutions to Externalities
• There are private solutions and public policy solutions to externalities
• Public policy
o Command and control
▪ Regulate behavior directly
o Market based solutions
▪ Provide solutions so that private decision makers will choose to solve the
problem on their own
▪ Corrective taxes and subsidies
▪ Tradable pollution permits
Public Policies Discussed in Friday’s Section
• Optimal Level of Pollution
o Costs to produce pollution to 0 are enormously costly
o From economic perspective you measure the benefits of pollution reduction in
relation to the costs of pollution
• Pigouvian Taxes and Subsidies
o Negative externality – costs imposed on third parties that markets are not taking
into account
o If there are negative externailities, the difference between the private and social
costs are the external costs
▪ The private market produces too much
• You can solve by imposing tax on suppliers of good = external cost
• Supply schedule shifts up (to the left)
• Private parties take it into account
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ECON 1201 Full Course Notes
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Document Summary
Econ 1201 lecture 14 notes solutions to externalities and intro to public goods. First study session on new stuff - april 9th at 5pm in oak 401. Private solutions: gives better understanding of why externalities come about and why public policy measures are needed. People will always bargain to get to the solution. Example: given hartford residents, the ct river, and a chemical company, assume the chemical company has pollution that costs ,000 and to abate it costs ,000. No: why not, think about what markets do transfer goods from those that value less to those that value more. If cost to bargain is 0, what would residents of hartford do: pay chemical company not to produce, would accept, costs to residents is greater than the cost to abate, now, it costs ,000 to negotiate. Hartford wins the right to be free of pollution.
