ECO3046 Public Economic : Theory of Least Cost Theorem of Pollution

The economy will not exhibit efficiency due to dead weight loss that will result due to taxation that occurs when the equilibrium for a good or service is not pareto optimal. The taxes present in the computer consumption reduce the chance of an equilibrium clearing condition. Tax in this case is considered as a non-market cost. It therefore has a negative effect on the demand of the computers which results in the creation of a deadweight loss that is formed by a reduction in the consumer surplus. The reduction in the consumer surplus reduces the demand for the product compared to the demand for cars which is not affected by the taxation of these goods. As a result, there is inefficient allocation given that the economy is prohibited due to a decrease in demand as the computers are far much expensive than hat people are willing to pay for (Atkinson and Stiglitz, 2015).

This is not a pareto efficient outcome since, the indifference curve of the individual A should be tangent to that of individual B. A pareto improvement will occur when the individuals move to a lower utility curve which will accommodate the production possibility frontier. The pareto improvement can be achieved when the overall economic action leads to an economic gain without any of the individuals being made worse off. In this case, a pareto improvement may mean that the utility curves are moved to a point on the production possibility curve (Hindriks and Myles, 2013).

4. For each programme listed below, discuss what market failures might be (or are) used 
as a partial rationale for government intervention: 
(i) National defense 

In the case the government allocates a large budget for National defense, it would be accompanied by a tax implication which other people who may not need that protection pay for it as well. In this way people may seek to avoid tax in order to reduce the tax penalty whereas they are not comfortable with the budget allocated by the government for national defense. In order to overcome this, governments should make reasonable allocations with regards to their National defense budgets to reduce the apathy that people may have towards paying taxes (Wingo and Evans, 2013).

(ii) Car insurance 

In the case of car insurance, it becomes more difficult for individuals who are low risk to find fair prices for insurance premiums since the insurers must compensate for high risk individuals. This results in a situation where it is less attractive for low risk individuals to consider car insurance which is valued higher than what they think it is worth. In order to overcome this, car insurers should provide individuals with the ability to undergo screening for whether they are high risk or low risk individuals. The high risk individuals should pay different premiums compared to individuals who are low risk. In this way, low risk customers will not avoid car insurance since they view it to be fairly allocated (Black and Steenkamp, 2015).

5. (a) Explain why each of the following is or is not a pure public good: 
(i) Sewage collection 

Sewage collection is not a pure public good. Sewage collection is semi non excludable. This is because it may be near impossible to exclude the benefits that come to the nonpaying members. In this way, sewage collection does not satisfy that characteristics of a pure public good (Atkinson and Stiglit, 2015).

(ii) Basic research 

Basic research is not a pure public good. Basic research may have an element of excludability. While the knowledge itself does not reduce the chance of the other person getting the knowledge itself, some aspects of those who provide it might bring about excludability.  For example when the information is published in journals with limited access; it only provides the knowledge to people who are willing to pay for it (Auebach and Saez, 2013).

(b) Compare and contrast the condition for efficient provision of a public good with that 
of a private good.

The condition for the efficient production of public goods is the same as that of the private goods in that the marginal cost of the good produced should be equal to the marginal cost of the goods not produced. The conditions are different in that they have different ways of identifying the value of the goods produced. For instance for public goods which have the aspect of being non rivalry, the value is determined by using the price at which each person is willing to pay for a certain quantity while for private goods which can be rivalry in comparison, the value is given by the marginal benefit which is obtained from an extra unit of consuming that product. This is because, with a private good the comparison is with the alternatives that are available to the individuals in that economy and the options at times can be mutually exclusive (Black and Steenkamp, 2015). However, in a public good, the social benefits and costs are those that count when considering efficient provision of the public good.

What is the problem with a market achieving efficiency in provision of a public good? 

Public goods are a source of market failure. This is because since the social benefits are equal even to those who do not pay for them, the free rider problem arises where other people benefit though they do not contribute towards the public good. With time, those who pay for the public good may decide not to leading to the under provision of the public good that leads to market failure. Also, the free rider problem comes into play when the individuals who receive the public good may not be concerned with its maintenance and therefore they might be inclined to destroy the facility which increases more costs for the governments to provide for. There is an element of irresponsibility when the public good s dynamic falls into play (Wingo and Evans, 2013).

6. Explain why subsidies for pollution abatement equipment, even if they result in an efficient level of pollution abatement, will not result in an efficient resource allocation. 

According to the theory of least cost theorem of pollution control, a necessary condition for abatement is that the marginal cost of abatement is equalized among all the abaters. This means that any additional cost incurred for the participation in abatement is the same across all firms that seek to abate (Hindriks and Myles, 2013).

For example, if there are two firms with two different cost functions. The abatement costs will be charged at 75 where the marginal cost of the two firms is the same. It does not mean that the cost portion for firm A and firm B will be equal. For this reason, an efficient resource allocation may not be reached especially because the firms may not be operating in the same industry and therefore any change in the level output in one firm may not influence the position of the other firm by making them worse off or better off (Ehrenberg and Smith, 2016).

References:

Atkinson, A.B. and Stiglitz, J.E., 2015. Lectures on public economics. Princeton University Press.

Auerbach, A.J., Chetty, R., Feldstein, M. and Saez, E. eds., 2013. Handbook of public economics (Vol. 5). Newnes.

Black, P., Calitz, E. and Steenkamp, T., 2015. Public economics. OUP Catalogue.

Ehrenberg, R.G. and Smith, R.S., 2016. Modern labor economics: Theory and public policy. Routledge.

Hindriks, J. and Myles, G.D., 2013. Intermediate public economics. MIT press.

Wingo Jr, L. and Evans, A., 2013. Public economics and the quality of life. Routledge.