經(jīng)濟(jì)學(xué)中級(jí)微觀經(jīng)濟(jì)學(xué)范里安課件Ch

ChapterThirty-ThreeExternalitiesChapterThirty-ThreeExternalit1ExternalitiesAnexternalityisacostorabenefitimposeduponaconsumerorafirmbyactionstakenbyothers.Thecostorbenefitisthusgeneratedexternallytotheconsumerorthefirm.Anexternallyimposedbenefitisapositiveexternality.Anexternallyimposedcostisanegativeexternality.ExternalitiesAnexternalityis2ExamplesofNegativeExternalitiesAirpollution.Waterpollution.Loudpartiesnextdoor.Trafficcongestion.Second-handcigarettesmokesufferedbyanon-smoker.Increasedhealthinsurancepremiaduetoalcoholortobaccoconsumption.ExamplesofNegativeExternali3ExamplesofPositiveExternalitiesAwell-maintainedpropertynextdoorthatraisesthemarketvalueofyourownproperty.Apleasantcologneorscentwornbythepersonseatednexttoyou.Improveddrivinghabitsthatreduceaccidentrisks.Ascientificadvance.ExamplesofPositiveExternali4ExternalitiesandEfficiencyThecrucialfeatureofanexternalityisthatitimpactsathirdparty;thatis,somebodywhoisnotdirectlyaparticipantintheactivitywhichproducestheexternalcostorbenefit.ExternalitiesandEfficiencyTh5ExternalitiesandEfficiencyExternalitiescauseParetoinefficiency;typicallytoomuchscarceresourceisallocatedtoanactivitywhichcausesanegativeexternalitytoolittleresourceisallocatedtoanactivitywhichcausesapositiveexternality.ExternalitiesandEfficiencyEx6ExternalitiesandPropertyRightsAnexternalitywillbetakentobeapurelypubliccommodity.Acommodityispurelypublicifitisconsumedbyeveryone(nonexcludability),andeverybodyconsumestheentireamountofthecommodity(nonrivalryinconsumption).E.g.abroadcasttelevisionprogram.ExternalitiesandPropertyRig7Inefficiency&NegativeExternalitiesConsideranexampleoftwoagents,AandB,andtwocommodities,moneyandsmoke.BothsmokeandmoneyaregoodsforAgentA.MoneyisagoodandsmokeisabadforAgentB.Smokeisapurelypubliccommodity.Inefficiency&NegativeExtern8Inefficiency&NegativeExternalitiesAgentAisendowedwith$yA.AgentBisendowedwith$yB.Smokeintensityismeasuredonascalefrom0(nosmoke)to1(maximumconcentration).Inefficiency&NegativeExtern9Inefficiency&NegativeExternalitiesOA10SmokemAyAMoneyandsmokeare

bothgoodsforAgentA.Inefficiency&NegativeExtern10Inefficiency&NegativeExternalitiesOA10SmokemAyAMoneyandsmokeare

bothgoodsforAgentA.BetterInefficiency&NegativeExtern11Inefficiency&NegativeExternalitiesOB10SmokemByBMoneyisagoodandsmokeisabadforAgentB.BetterInefficiency&NegativeExtern12Inefficiency&NegativeExternalitiesOB10SmokemByBMoneyisagoodandsmokeisabadforAgentB.BetterInefficiency&NegativeExtern13Inefficiency&NegativeExternalitiesWhataretheefficientallocationsofsmokeandmoney?Inefficiency&NegativeExtern14Inefficiency&NegativeExternalitiesOA10SmokemAyAOB10SmokemByBInefficiency&NegativeExtern15Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBInefficiency&NegativeExtern16Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBInefficiency&NegativeExtern17Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBInefficiency&NegativeExtern18Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBEfficientallocationsInefficiency&NegativeExtern19Inefficiency&NegativeExternalitiesSupposethereisnomechanismbywhichmoneycanbeexchangedforchangesinsmokelevel.WhatthenisAgentA’smostpreferredallocation?Isthisallocationefficient?Inefficiency&NegativeExtern20Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBEfficientallocationsInefficiency&NegativeExtern21Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBEfficientallocationsA’schoicesInefficiency&NegativeExtern22Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBEfficientallocationsA’smost

preferredchoice

isinefficientInefficiency&NegativeExtern23Inefficiency&NegativeExternalitiesContinuetosupposethereisnomechanismbywhichmoneycanbeexchangedforchangesinsmokelevel.WhatisAgentB’smostpreferredallocation?Isthisallocationefficient?Inefficiency&NegativeExtern24Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBEfficientallocationsB’schoicesInefficiency&NegativeExtern25Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBEfficientallocationsB’smost

preferredchoiceInefficiency&NegativeExtern26Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBEfficientallocationsB’smost

preferredchoice

isinefficientInefficiency&NegativeExtern27Inefficiency&NegativeExternalitiesSoifneitherAnorBcantrademoneyforchangesinsmokeintensity,thentheoutcomeisinefficient.Eitherthereistoomuchsmoke(A’smostpreferredchoice)orthereistoolittlesmoke(B’schoice).Inefficiency&NegativeExtern28ExternalitiesandPropertyRightsRonaldCoase’sinsightisthatmostexternalityproblemsareduetoaninadequatespecificationofpropertyrightsand,consequently,anabsenceofmarketsinwhichtradecanbeusedtointernalizeexternalcostsorbenefits.ExternalitiesandPropertyRig29ExternalitiesandPropertyRightsCausingaproducerofanexternalitytobearthefullexternalcostortoenjoythefullexternalbenefitiscalledinternalizingtheexternality.ExternalitiesandPropertyRig30ExternalitiesandPropertyRightsNeitherAgentAnorAgentBownstheairintheirroom.Whathappensifthispropertyrightiscreatedandisassignedtooneofthem?ExternalitiesandPropertyRig31ExternalitiesandPropertyRightsSupposethatAgentBisassignedownershipoftheairintheroom.AgentBcannowsell“rightstosmoke”.Willtherebeanysmoking?Ifso,howmuchsmokingwiththerebeandwhatwillbetheequilibriumpriceforthisamountofsmoke?ExternalitiesandPropertyRig32ExternalitiesandPropertyRightsLetp(sA)bethepricepaidbyAgentAtoAgentBinordertocreateasmokeintensityofsA.ExternalitiesandPropertyRig33ExternalitiesandPropertyRightsOA10SmokemAOB10SmokemByAyBExternalitiesandPropertyRig34ExternalitiesandPropertyRightsOA10SmokemAOB10SmokemByAyBExternalitiesandPropertyRig35ExternalitiesandPropertyRightsOA10SmokemAOB10SmokemByAyBp(sA)sAExternalitiesandPropertyRig36ExternalitiesandPropertyRightsOA10SmokemAOB10SmokemByAyBp(sA)Bothagentsgainandthereisapositiveamountofsmoking.sAExternalitiesandPropertyRig37ExternalitiesandPropertyRightsOA10SmokemAOB10SmokemByAyBp(sA)sAEstablishingamarketfortradingrightstosmokecausesanefficientallocationtobeachieved.ExternalitiesandPropertyRig38ExternalitiesandPropertyRightsSupposeinsteadthatAgentAisassignedtheownershipoftheairintheroom.AgentBcannowpayAgentAtoreducethesmokeintensity.Howmuchsmokingwilltherebe?HowmuchmoneywillAgentBpaytoAgentA?ExternalitiesandPropertyRig39ExternalitiesandPropertyRightsOA10SmokemAOB10SmokemByAyBExternalitiesandPropertyRig40ExternalitiesandPropertyRightsOA10SmokemAOB10SmokemByAyBExternalitiesandPropertyRig41ExternalitiesandPropertyRightsOA10SmokemAOB10SmokemByAyBsBp(sB)ExternalitiesandPropertyRig42ExternalitiesandPropertyRightsOA10SmokemAOB10SmokemByAyBp(sB)Bothagentsgainandthereisareducedamountofsmoking.sBExternalitiesandPropertyRig43ExternalitiesandPropertyRightsOA10SmokemAOB10SmokemByAyBp(sB)Establishingamarketfortradingrightstoreduce

smokecausesanefficientallocationtobeachieved.sBExternalitiesandPropertyRig44ExternalitiesandPropertyRightsNoticethattheagentgiventhepropertyright(asset)isbetteroffthanathis/herownmostpreferredallocationintheabsenceofthepropertyright.Noticealsothattheamountofsmokingthatoccursinequilibriumtypicallydependsuponwhichagentisassignedthepropertyright.ExternalitiesandPropertyRig45ExternalitiesandPropertyRightsOA10SmokemAOB10SmokemByAyBp(sB)p(sA)sA

1sBsBsAExternalitiesandPropertyRig46ExternalitiesandPropertyRightsIsthereacaseinwhichthesameamountofsmokingoccursinequilibriumnomatterwhichoftheagentsisassignedownershipoftheairintheroom?ExternalitiesandPropertyRig47ExternalitiesandPropertyRightsOA10SmokemAOB10SmokemByAyBp(sB)p(sA)sA=sBExternalitiesandPropertyRig48ExternalitiesandPropertyRightsOA10SmokeOB10SmokeyAyBp(sB)p(sA)sA=sBForbothagents,theMRSisconstantas

moneychanges,forgivensmokeintensity.ExternalitiesandPropertyRig49ExternalitiesandPropertyRightsOA10SmokeOB10SmokeyAyBp(sB)p(sA)sA=sBSo,forbothagents,preferencesmustbe

quasilinearinmoney;U(m,s)=m+f(s).ExternalitiesandPropertyRig50Coase’sTheoremCoase’sTheoremis:Ifallagents’preferencesarequasilinearinmoney,thentheefficientleveloftheexternalitygeneratingcommodityisproducednomattertowhichagentitspropertyrightisassigned.Coase’sTheoremCoase’sTheorem51ProductionExternalitiesConsiderasteelmillwhichproducesjointlysteelandpollution.Thepollutionadverselyaffectsanearbyfishery.Bothfirmsareprice-takers.pSisthemarketpriceofsteel.pFisthemarketpriceoffish.ProductionExternalitiesConsid52ProductionExternalitiescS(s,x)isthesteelfirm’scostofproducingsunitsofsteeljointlywithxunitsofpollution.Ifthesteelfirmdoesnotfaceanyoftheexternalcostsofitspollutionproductionthenitsprofitfunctionis

andthefirm’sproblemistoProductionExternalitiescS(s,x53ProductionExternalitiesThefirst-orderprofit-maximization

conditionsareProductionExternalitiesThefi54ProductionExternalitiesThefirst-orderprofit-maximization

conditionsareandProductionExternalitiesThefi55ProductionExternalitiesstatesthatthesteelfirmshouldproducetheoutputlevelofsteelforwhichprice=marginalproductioncost.ProductionExternalitiesstates56ProductionExternalitiesstatesthatthesteelfirmshouldproducetheoutputlevelofsteelforwhichprice=marginalproductioncost.istherateatwhichthefirm’sinternalproductioncostgoesdownasthepollutionlevelrisesProductionExternalitiesstates57ProductionExternalitiesstatesthatthesteelfirmshouldproducetheoutputlevelofsteelforwhichprice=marginalproductioncost.istherateatwhichthefirm’sinternalproductioncostgoesdownasthepollutionlevelrises,soisthemarginalcosttothefirmofpollutionreduction.ProductionExternalitiesstates58ProductionExternalitiesisthemarginalcosttothefirmofpollutionreduction.Whatisthemarginalbenefittothesteelfirmfromreducingpollution?ProductionExternalitiesisthe59ProductionExternalitiesisthemarginalcosttothefirmofpollutionreduction.Whatisthemarginalbenefittothesteelfirmfromreducingpollution?Zero,sincethefirmdoesnotfaceitsexternalcost.HencethesteelfirmchoosesthepollutionlevelforwhichProductionExternalitiesisthe60ProductionExternalitiesandthefirst-orderprofit-maximization

conditionsareandE.g.,supposecS(s,x)=s2+(x-4)2and

pS=12.ThenProductionExternalitiesandth61ProductionExternalitiesdeterminestheprofit-max.outputlevelofsteel;s*=6.ProductionExternalitiesdeterm62ProductionExternalitiesdeterminestheprofit-max.outputlevelofsteel;s*=6.isthemarginalcosttothefirmfrompollutionreduction.Sinceitgetsnobenefitfromthisitsetsx*=4.ProductionExternalitiesdeterm63ProductionExternalitiesdeterminestheprofit-max.outputlevelofsteel;s*=6.isthemarginalcosttothefirmfrompollutionreduction.Sinceitgetsnobenefitfromthisitsetsx*=4.Thesteelfirm’smaximumprofitlevelis

thusProductionExternalitiesdeterm64ProductionExternalitiesThecosttothefisheryofcatchingfunitsoffishwhenthesteelmillemitsxunitsofpollutioniscF(f,x).Givenf,cF(f,x)increaseswithx;i.e.thesteelfirminflictsanegativeexternalityonthefishery.ProductionExternalitiesTheco65ProductionExternalitiesThecosttothefisheryofcatchingfunitsoffishwhenthesteelmillemitsxunitsofpollutioniscF(f,x).Givenf,cF(f,x)increaseswithx;i.e.thesteelfirminflictsanegativeexternalityonthefishery.Thefishery’sprofitfunctionis

sothefishery’sproblemistoProductionExternalitiesTheco66ProductionExternalitiesThefirst-orderprofit-maximization

conditionisProductionExternalitiesThefi67ProductionExternalitiesThefirst-orderprofit-maximization

conditionisProductionExternalitiesThefi68ProductionExternalitiesThefirst-orderprofit-maximization

conditionisHigherpollutionraisesthefishery’s

marginalproductioncostandlowersboth

itsoutputlevelanditsprofit.Thisistheexternalcostofthepollution.ProductionExternalitiesThefi69ProductionExternalitiesE.g.,supposecF(f;x)=f2+xfandpF=10.

Theexternalcostinflictedonthefisherybythesteelfirmisxf.Sincethefisheryhasnocontroloverxitmusttakethesteelfirm’schoiceofxasagiven.Thefishery’sprofitfunctionisthusProductionExternalitiesE.g.,70ProductionExternalitiesGivenx,thefirst-orderprofit-maximization

conditionisProductionExternalitiesGiven71ProductionExternalitiesGivenx,thefirst-orderprofit-maximization

conditionisSo,givenapollutionlevelxinflictedupon

it,thefishery’sprofit-maximizingoutput

levelisProductionExternalitiesGiven72ProductionExternalitiesGivenx,thefirst-orderprofit-maximization

conditionisSo,givenapollutionlevelxinflictedupon

it,thefishery’sprofit-maximizingoutput

levelisNoticethatthefisheryproducesless,and

earnslessprofit,asthesteelfirm’s

pollutionlevelincreases.ProductionExternalitiesGiven73ProductionExternalitiesThesteelfirm,ignoringits

externalcostinflicteduponthefishery,

choosesx*=4,sothefishery’s

profit-maximizingoutputlevelgiventhe

steelfirm’schoiceofpollutionlevelis

f*=3,givingthefisheryamaximum

profitlevelofNoticethattheexternalcostis$12.ProductionExternalities74ProductionExternalitiesArethesechoicesbythetwofirmsefficient?Whenthesteelfirmignorestheexternalcostsofitschoices,thesumofthetwofirm’sprofitsis$36+$9=$45.Is$45thelargestpossibletotalprofitthatcanbeachieved?ProductionExternalitiesAreth75MergerandInternalizationSupposethetwofirmsmergetobecomeone.Whatisthehighestprofitthisnewfirmcanachieve?MergerandInternalizationSupp76MergerandInternalizationSupposethetwofirmsmergetobecomeone.Whatisthehighestprofitthisnewfirmcanachieve?

Whatchoicesofs,fandxmaximizethenewfirm’sprofit?MergerandInternalizationSupp77MergerandInternalizationThefirst-orderprofit-maximization

conditionsareThesolutionisMergerandInternalizationThe78MergerandInternalizationAndthemergedfirm’smaximumprofit

levelisThisexceeds$45,thesumofthenon-mergedfirms.MergerandInternalizationAnd79MergerandInternalizationMergerhasimprovedefficiency.Onitsown,thesteelfirmproducedx*=4unitsofpollution.Withinthemergedfirm,pollutionproductionisonlyxm=2units.Somergerhascausedbothanimprovementinefficiencyandlesspollutionproduction.Why?MergerandInternalizationMerg80MergerandInternalizationThesteelfirm’sprofitfunctionissothemarginalcostofproducingxunitsofpollutionisand,sinceitdoesnothavetofacetheexternalcostsofitspollution,thesteelfirmincreasespollutionuntilthismarginalcostiszero;hencex*=4.MergerandInternalizationThe81MergerandInternalizationInthemergedfirmtheprofitfunctionisThemarginalcostofpollutionisthusMergerandInternalizationInt82MergerandInternalizationInthemergedfirmtheprofitfunctionisThemarginalcostofpollutionisMergerandInternalizationInt83MergerandInternalizationInthemergedfirmtheprofitfunctionisThemarginalcostofpollutionisThemergedfirm’smarginalpollutioncostislargerbecauseitfacesthefullcostofitsownpollutionthroughincreasedcostsofproductioninthefishery,solesspollutionisproducedbythemergedfirm.MergerandInternalizationInt84MergerandInternalizationButwhyisthemergedfirm’spollutionlevelofxm=2efficient?MergerandInternalizationBut85MergerandInternalizationButwhyisthemergedfirm’spollutionlevelofxm=2efficient?Theexternalcostinflictedonthefisheryisxf,sothemarginalexternalpollutioncostisMergerandInternalizationBut86MergerandInternalizationButwhyisthemergedfirm’spollutionlevelofxm=2efficient?Theexternalcostinflictedonthefisheryisxf,sothemarginalexternalpollutioncostisThesteelfirm’scostofreducingpollutionisMergerandInternalizationBut87MergerandInternalizationButwhyisthemergedfirm’spollutionlevelofxm=2efficient?Theexternalcostinflictedonthefisheryisxf,sothemarginalexternalpollutioncostisThesteelfirm’scostofreducingpollutionisEfficiencyrequiresMergerandInternalizationBut88MergerandInternalizationMergerthereforeinternalizesanexternalityandinduceseconomicefficiency.Howelsemightinternalizationbecausedsothatefficiencycanbeachieved?MergerandInternalizationMerg89TheTragedyoftheCommonsConsideragrazingareaowned“incommon”byallmembersofavillage.Villagersgrazecowsonthecommon.Whenccowsaregrazed,totalmilkproductionisf(c),wheref’>0andf”<0.Howshouldthevillagersgrazetheircowssoastomaximizetheiroverallincome?TheTragedyoftheCommonsCons90TheTragedyoftheCommonscMilkf(c)TheTragedyoftheCommonscMil91TheTragedyoftheCommonsNormalizethepriceofaunitofmilkto$1andlettherelativecostofgrazingacowbe$pc.Thentheprofitfunctionfortheentirevillageis

andthevillage’sproblemistoTheTragedyoftheCommonsNorm92TheTragedyoftheCommonsTheincome-maximizingnumberofcowstograze,c*,satisfiesi.e.themarginalincomegainfromthelastcowgrazedmustequalthe

marginalcostofgrazingit.TheTragedyoftheCommonsThe93TheTragedyoftheCommonscMilkf(c)pccslope=f’(c*)c*slope=pcTheTragedyoftheCommonscMil94TheTragedyoftheCommonscMilkf(c)pccslope=f’(c*)c*slope=pcMaximalincomef(c*)TheTragedyoftheCommonscMil95TheTragedyoftheCommonsForc=c*,theaveragegainpercowgrazedis

becausef’>0andf”<0.TheTragedyoftheCommonsFor96TheTragedyoftheCommonscMilkf(c)pccslope=f’(c*)c*f(c*)TheTragedyoftheCommonscMil97TheTragedyoftheCommonsForc=c*,theaveragegainpercowgrazedis

becausef’>0andf”<0.Sotheeconomicprofitfromintroducingonemorecowispositive.Sincenobodyownsthecommon,entryisnotrestricted.TheTragedyoftheCommonsFor98TheTragedyoftheCommonsEntrycontinuesuntiltheeconomicprofitofgrazinganothercowiszero;thatis,untilTheTragedyoftheCommonsEntr99TheTragedyoftheCommonscMilkf(c)pccslope=f’(c*)c*f(c*)TheTragedyoftheCommonscMil100TheTragedyoftheCommonscMilkf(c)pccslope=f’(c*)c*f(c*)Thecommonsareover-grazed,tragically.TheTragedyoftheCommonscMil101TheTragedyoftheCommonsThereasonforthetragedyisthatwhenavillagerintroducesonemorecow,thatvillager’sincomeincreases(byf(c)/c-pc)buteveryothervillager’sincomefalls.Thevillagerwhointroducestheextracowtakesnoaccountofthenegativeexternalityinflictedupontherestofthevillage.TheTragedyoftheCommonsThe102TheTragedyoftheCommonsModern-day“tragediesofthecommons”includeover-fishingthehighseasover-loggingforestsonpubliclandsover-intensiveuseofpublicparks;e.g.Yellowstone.urbantrafficcongestion.TheTragedyoftheCommonsMode103ChapterThirty-ThreeExternalitiesChapterThirty-ThreeExternalit104ExternalitiesAnexternalityisacostorabenefitimposeduponaconsumerorafirmbyactionstakenbyothers.Thecostorbenefitisthusgeneratedexternallytotheconsumerorthefirm.Anexternallyimposedbenefitisapositiveexternality.Anexternallyimposedcostisanegativeexternality.ExternalitiesAnexternalityis105ExamplesofNegativeExternalitiesAirpollution.Waterpollution.Loudpartiesnextdoor.Trafficcongestion.Second-handcigarettesmokesufferedbyanon-smoker.Increasedhealthinsurancepremiaduetoalcoholortobaccoconsumption.ExamplesofNegativeExternali106ExamplesofPositiveExternalitiesAwell-maintainedpropertynextdoorthatraisesthemarketvalueofyourownproperty.Apleasantcologneorscentwornbythepersonseatednexttoyou.Improveddrivinghabitsthatreduceaccidentrisks.Ascientificadvance.ExamplesofPositiveExternali107ExternalitiesandEfficiencyThecrucialfeatureofanexternalityisthatitimpactsathirdparty;thatis,somebodywhoisnotdirectlyaparticipantintheactivitywhichproducestheexternalcostorbenefit.ExternalitiesandEfficiencyTh108ExternalitiesandEfficiencyExternalitiescauseParetoinefficiency;typicallytoomuchscarceresourceisallocatedtoanactivitywhichcausesanegativeexternalitytoolittleresourceisallocatedtoanactivitywhichcausesapositiveexternality.ExternalitiesandEfficiencyEx109ExternalitiesandPropertyRightsAnexternalitywillbetakentobeapurelypubliccommodity.Acommodityispurelypublicifitisconsumedbyeveryone(nonexcludability),andeverybodyconsumestheentireamountofthecommodity(nonrivalryinconsumption).E.g.abroadcasttelevisionprogram.ExternalitiesandPropertyRig110Inefficiency&NegativeExternalitiesConsideranexampleoftwoagents,AandB,andtwocommodities,moneyandsmoke.BothsmokeandmoneyaregoodsforAgentA.MoneyisagoodandsmokeisabadforAgentB.Smokeisapurelypubliccommodity.Inefficiency&NegativeExtern111Inefficiency&NegativeExternalitiesAgentAisendowedwith$yA.AgentBisendowedwith$yB.Smokeintensityismeasuredonascalefrom0(nosmoke)to1(maximumconcentration).Inefficiency&NegativeExtern112Inefficiency&NegativeExternalitiesOA10SmokemAyAMoneyandsmokeare

bothgoodsforAgentA.Inefficiency&NegativeExtern113Inefficiency&NegativeExternalitiesOA10SmokemAyAMoneyandsmokeare

bothgoodsforAgentA.BetterInefficiency&NegativeExtern114Inefficiency&NegativeExternalitiesOB10SmokemByBMoneyisagoodandsmokeisabadforAgentB.BetterInefficiency&NegativeExtern115Inefficiency&NegativeExternalitiesOB10SmokemByBMoneyisagoodandsmokeisabadforAgentB.BetterInefficiency&NegativeExtern116Inefficiency&NegativeExternalitiesWhataretheefficientallocationsofsmokeandmoney?Inefficiency&NegativeExtern117Inefficiency&NegativeExternalitiesOA10SmokemAyAOB10SmokemByBInefficiency&NegativeExtern118Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBInefficiency&NegativeExtern119Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBInefficiency&NegativeExtern120Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBInefficiency&NegativeExtern121Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBEfficientallocationsInefficiency&NegativeExtern122Inefficiency&NegativeExternalitiesSupposethereisnomechanismbywhichmoneycanbeexchangedforchangesinsmokelevel.WhatthenisAgentA’smostpreferredallocation?Isthisallocationefficient?Inefficiency&NegativeExtern123Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBEfficientallocationsInefficiency&NegativeExtern124Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBEfficientallocationsA’schoicesInefficiency&NegativeExtern125Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBEfficientallocationsA’smost

preferredchoice

isinefficientInefficiency&NegativeExtern126Inefficiency&NegativeExternalitiesContinuetosupposethereisnomechanismbywhichmoneycanbeexchangedforchangesinsmokelevel.WhatisAgentB’smostpreferredallocation?Isthisallocationefficient?Inefficiency&NegativeExtern127Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBEfficientallocationsB’schoicesInefficiency&NegativeExtern128Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBEfficientallocationsB’smost

preferredchoiceInefficiency&NegativeExtern129Inefficiency&NegativeExternalitiesOA10SmokemAOB10SmokemByAyBEfficientallocationsB’smost

preferredchoice

isinefficientInefficiency&NegativeExtern130Inefficiency&NegativeExternalitiesSoifneitherAnorBcantrademoneyforchangesinsmokeintensity,thentheoutcomeisinefficient.Eitherthereistoomuchsmoke(A’smostpreferredchoice)orthereistoolittlesmoke(B’schoice).Inefficiency&NegativeExtern131ExternalitiesandPropertyRightsRonaldCoase’sinsightisthatmostexternalityproblemsareduetoaninadequatespecificationofpropertyrightsand,consequently,anabsenceofmarketsinwhichtradecanbeusedtointernalizeexternalcostsorbenefits.ExternalitiesandPropertyRig132ExternalitiesandPropertyRightsCausingaprod