# Government actions in externalities

##### Intros
###### Lessons
1. Government Actions in Externalities Overview
2. How Government Regulates Negative Externalities
• Property Rights
• Taxes
• Emissions Charges
3. Using Pollution Tax for Negative Externalities
• Add Tax to MC curve
• S = MC + tax
• Supply curve = Marginal social curve
• Optimal social output achieved
• Government gains Tax revenue
4. How Government Regulates Positive Externalities
• Public Production
• Subsidies
• Vouchers
5. Using Subsidies for Positive Externalities
• Subtract Marginal Social Cost with Subsidy
• S1 = MSC - subsidy
• Market Equilibrium at intersection of S1 & MB
• Quantity same as optimal social output
##### Examples
###### Lessons
1. Questions Relating to Negative Externalities
Suppose a firm produces pesticides, but it also produces wastes which they dump into a lake. The following table shows the demand schedule and marginal cost for pesticides. Assume that the marginal external cost is equal to the marginal cost.

 Price Quantity Marginal Cost 4 50 10 8 40 8 12 30 6 16 20 4 20 10 2

1. If there are no regulations for the waste, what is the quantity and price of pesticides produced? What is the marginal external cost?
2. If residents now have property rights for the lake, how would the firm change its quantity and price of pesticides?
2. Suppose a firm produces greenhouse gas emissions for a product. The following graph shows the marginal social benefit and marginal private cost. Assume the marginal external cost is 4.

1. If there are no regulations for the greenhouse gas emissions, what is the quantity and price of pesticides produced?
2. The government implements a caps-and-trade to the product. What would be the maximum quantity set by the government to reduce greenhouse gas emissions?
3. With caps-and-trade, what would the price of the product be? When do firms stop trading permits?
3. Suppose a firm produces goods that pollutes a river nearby. The following table shows the demand schedule and marginal cost for the good. Assume that the marginal external cost is equal to the marginal cost.

 Price Quantity Marginal Cost 2 125 5 4 100 4 6 75 3 8 50 2 10 25 1

1. If there are no government actions to control pollution, what is the quantity and price of goods produced, and the marginal external cost of the pollution generated?
2. If the government levies a pollution tax, what would the efficient quantity and price be for the good?
3. What is the tax levied?
4. What is the government tax revenue per day?
4. Questions Relating to Positive Externalities
The marginal cost of educating a student is a constant $2,000 a year, and the following table shows the student's marginal benefit curve. University education has an external benefits of$1,000 per student per year.

 Price (of Tuition in thousands) Quantity (student's per year in thousands) 5 50 4 100 3 150 2 200 1 250

1. If all universities are private, and the education market is competitive, then what is the tuition and the number of students enrolled per year?
2. If the government creates public universities, what tuition will universities charge and taxpayers pay to achieve an efficient number of students?
5. The marginal cost of educating a student is a constant $2,000 a year, and the following table shows the student's marginal benefit curve. University education has an external benefit of$1,000 per student per year.

 Price (of Tuition in thousands) Quantity (student's per year in thousands) 5 50 4 100 3 150 2 200 1 250

1. If the government decides to subsidize private universities, what subsidy would achieve the efficient number of university students?
2. If the government offers vouchers to students who enroll into universities with no subsidy, what should the value of the voucher be to achieve the efficient number of university students?