Beruflich Dokumente
Kultur Dokumente
2 Microeconomics
Discussion Class
October 4, 2018
UP School of Economics
Glacer Vasquez
glacervasquez@gmail.com
10/4/18 Econ 100.2 Discussion Class
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Recap
10/4/18 Econ 100.2 Discussion Class
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Recap
P
1000
900
800
700
600
S
500
400
300
200
D
100
0
0 50 100 150 200 250 300
Q
10/4/18 Econ 100.2 Discussion Class
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EXTERNALITIEs
Ø Externality
Ø Nega&ve
Externality
Ø Posi&ve
Externality
Ø Public
Policies
Ø Correc&ve
Tax
vs
Regula&on
Ø Regula&on
vs
Tradable
Pollu&on
Permits
Ø Correc&ve
Tax
vs
Tradable
Pollu&on
Permits
Ø Private
Solu&ons
800
700
600
S
500
PE 400
300
PE 400
300
200
D
External cost
100
0
0 50 100 150 200 250 300
QE Q
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Negative Externality
P
1000
How do we represent the negative
900 externality?
800
Social cost
700
600
S
500
PE 400
300
200
D
External cost Social cost = private cost + external cost
100
0
0 50 100 150 200 250 300
QE Q
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Negative Externality
P
1000
What is the socially optimal quantity?
900
800
Social cost
700
600
S
500
PE 400
300
200
D
Q = 200?
100 Q = 100?
Q = 150?
0
0 50 100 150 200 250 300
QOptimum QE Q
10/4/18 Econ 100.2 Discussion Class
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Negative Externality
P
1000
Compare the market equilibrium and the
900 social optimum.
800
Social cost
700
600
S
500
PE 400
300
200
D
Market equilibrium (Q = 200) is larger
100 than social optimum (Q = 150).
How do we internalize the externality?
0
0 50 100 150 200 250 300
QOptimum QE Q
10/4/18 Econ 100.2 Discussion Class
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Negative Externality
700
600
S
500
PE 400
300
700
600
S
500
200
D
100 Social value = private value + external
benefit
0
0 50 100 150 200 250 300
QE Q
10/4/18 Econ 100.2 Discussion Class
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Positive Externality
P
1000
What is the socially optimal quantity?
900
800
700
600
S
500
200
D
Q = 200?
100 Q = 150?
Q = 250?
0
0 50 100 150 200 250 300
QE Q
QOptimum
10/4/18 Econ 100.2 Discussion Class
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Positive Externality
P
1000
Compare the market equilibrium and the
900 social optimum.
800
700
600
S
500
200
D
Market equilibrium (Q = 200) is smaller
100 than social optimum (Q = 250).
How do we internalize the externality?
0
0 50 100 150 200 250 300
QE Q
QOptimum
10/4/18 Econ 100.2 Discussion Class
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Positive Externality
Nega&ve
externality
• market
equilibrium
quan&ty
is
larger
than
socially
desirable
• to
internalize
the
externality,
tax
goods
with
nega&ve
externali&es
Posi&ve
Externality
• market
equilibrium
quan&ty
is
smaller
than
socially
desirable
• to
internalize
the
externality,
subsidize
goods
with
posi&ve
externali&es
800
700
600
500
800 Supply of
Pollution Permits
700
600
500
P 400
300
Demand for
200 Pollution permits set the quantity of pollution rights
pollution which, together with the
100 demand curve, determines the price of
pollution.
0
0 50 100 150 200 250 300
Quantity of pollution
• A
correc&ve
tax
raises
the
price
of
pollu&ng
and
thus
reduces
the
quan&ty
of
pollu&on
firms
demand.
• A
tradable
permits
system
restricts
the
supply
of
pollu&on
rights,
has
the
same
effect
as
the
tax.
• When
policymakers
do
not
know
the
posi&on
of
this
demand
curve,
which
public
policy
achieves
reduc&on
targets
more
precisely?
• The
tradable
pollu&on
permits
system
achieves
pollu&on
reduc&on
targets
more
precisely.
The private market achieves the efficient outcome regardless of the initial distribution of rights.
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Private Solutions
Ø Externality
Ø Nega&ve
Externality
Ø Posi&ve
Externality
Ø Public
Policies
Ø Correc&ve
Tax
vs
Regula&on
Ø Regula&on
vs
Tradable
Pollu&on
Permits
Ø Correc&ve
Tax
vs
Tradable
Pollu&on
Permits
Ø Private
Solu&ons
1. Market Efficiency
2. Taxation and Efficiency
1. Externalities
2. Public goods
SECOND EXAMINATION
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What’s next?