Scot Wick Blog

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 4 The Economics of the Public Sector Chapter 10 of 36 E xternalities    Section 8 of 18 … A potentially important type of positive externality is a “ technology spillover” This is the impact of one firm's research and production efforts on other firms' technological advances. Whenever a firm designs and builds a new design electric vehicle (EV) there is some chance it will develop some new technology. This new design EV may benefit not only this firm, but society as a whole, because the design will become part of society's common technological knowledge. … The new design has positive externalities for other producers in the economy. The government could attempt to maximize the benefit of this externality by subsidizing the production of EVs. Per Figure A, if the government paid firms a subsidy for each EV produced the...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 4 The Economics of the Public Sector Chapter 10 of 36 E xternalities   Section 7 of 19 … Figure 3 - Education and the Social Optimum In the case of a positive externality · the social value of the good exceeds the private value of the good · the optimal quantity Qoptimum is larger than the equilibrium quantity Qmarket … Some activities such as pollution create external costs on third parties. Other activities create the opposite: external benefits. The benefit of education is largely private. The consumer of education becomes a more productive worker and reaps benefits including higher wages. Education also creates positive externalities. A more educated population leads to · increased employment and wealth for society at large · development and dissemination of technological advances · lower crime rates · more informed voters and better gove...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 4 The Economics of the Public Sector Chapter 10 of 36 E xternalities    Section 6 of 19 … In the case of pollution externality, free market inefficiency occurs because free market equilibrium includes only the private costs of production with little or no concern about pollution. Per Figure 2 one way for the social planner to achieve the optimum equilibrium would be to tax aluminum producers B – A amount for each ton of aluminum sold. The tax shifts the supply curve for aluminum upward by the size of the tax. … If the tax accurately reflects the external cost of pollution released into the atmosphere the new supply curve would be the full social-cost curve. In the new optimum equilibrium aluminum producers produce the socially optimal quantity of aluminum Qoptimum. The use of such a tax is called “internalizing the exte...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 4 The Economics of the Public Sector Chapter 10 of 36 E xternalities    Section 5 of 19 … Figure 2 - Pollution and the Social Optimum In the presence of a negative externality, such as pollution, the social cost of the good exceeds the private cost. The optimal quantity Qoptimum is therefore smaller than the free market equilibrium quantity Qmarket. … Aluminum factories emit pollution. For each unit of aluminum produced a certain amount of smoke enters the atmosphere. This is a negative externality because the smoke causes health problems. Because of the externality the cost to society of producing aluminum is larger than the direct costs for aluminum producers. For each unit of aluminum produced, the social cost includes · the private costs of the aluminum producers · the social costs to bystanders adversely af...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 4 The Economics of the Public Sector Chapter 10 of 36 Externalities Section 4 of 17 … Figure 1 - The Market for Aluminum This shows supply and demand curves in an unregulated market for aluminum. The demand curve reflects the value to buyers. The supply curve reflects the costs of production of sellers. The equilibrium quantity, Qmarket · maximizes the total value to buyers · maximizes the total profits of sellers In the absence of externalities, the market equilibrium is efficient. … If there is any government intervention the price/quantity equilibrium will change. To address negative and positive externalities · government taxes or other disincentives will decrease quantity supplied and demanded, moving the equilibrium point left · government subsidies or other incentives will increase quantity supplied and demanded, moving the equilibrium point right … … positive externalities and negative externa...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 4 The Economics of the Public Sector Chapter 10 of 36 Externalities Section 3 of 17 There are two types of externalities · negative externality, if the impact on the bystander is detrimental · positive externality, if the impact on the bystander is beneficial When externalities occur society's interest in a market outcome · extends beyond the well-being of the buyers and sellers who participate in the market. · also includes the well-being of non-participant bystanders who are affected by the externality … Buyers and sellers in a market neglect/minimalize the external effects of their actions when deciding how much to demand or supply. Because people who do not buy or sell in the market are affected, the market equilibrium is not efficient when there are externalities. When externalities such as pollution are created by a market, the equilibrium does not maximize the total benefit to the entire societ...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 4 The Economics of the Public Sector Chapter 10 of 36 Externalities Section 2 of 17 … Firms that make paper create the chemical dioxin as a manufacturing byproduct. Scientists have determined dioxin in the environment raises the risk of cancer and other health problems. In previous chapters we saw · the forces of supply and demand determine efficient allocation of scarce resources · the market equilibrium of supply and demand is the price/quantity point of efficient allocation of resources When the paper market is at natural market equilibrium, should we conclude dioxin emissions are not excessive? … Restated from Chapter 1, the ten principles of Economics: 1: people face trade-offs 2: the cost of something is what you give up to get it 3: rational people think at the margin 4: people respond to incentives 5: trade can make everyone better off 6: markets are usually a good way to organize economic act...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 4 The Economics of the Public Sector Chapter 10 of 36 Externalities Section 1 of 17 … Chapter 10 topics: Externalities and Market Inefficiency Welfare Economics: A Recap Negative Externalities Positive Externalities Technology Spillovers, Industrial Policy, and Patent Protection Public Policies Toward Externalities Command and Control Policies: Regulation Market-Based Policy 1: Corrective Taxes and Subsidies Market-Based Policy 2: Tradable Pollution Permits Objections To The Economic Analysis of Pollution Private Solutions To Externalities The Types Of Private Solutions The Coase Theorem … … private solutions to externalities gaibu-sei ni minkan no kaiketsusaku 外部性に民間の解決策

  What If All Of Us Were Union Members? First, watch this short video “Do Unions Raise Wages?” https://www.youtube.com/watch?v=S3EUrI63SnA … Most economists agree the demand for labor is elastic, meaning an almost horizontal labor demand curve for labor. Demand for labor is sensitive to wage level, e.g. if wage level goes up 10% the number workers demanded goes down more than 10%. Per Figure 1, with full unionization of an industry with resulting wage level of B employment in the industry would substantially decrease, from D to C. The former union workers and potential ones find work in non-union industries where employers pay lower market value wages. For the unionized workers who keep their jobs wages would go up to B. Total employment and total wages paid in the industry would both decrease because of elastic demand for labor. The industry's total wages paid before unionization is the larger area 0-A-E-D. The economy's total wages paid after unionization is the smaller area ...