Externalities: Chapter Summary:
An externality increases when one party directly expresses a benefit or cost to others. A network externality occurs whenever a benefit or cost directly conveyed to others based on the total number of other users. An item is a public good when one person’s raise in consumption doesn’t decrease the quantity available to others. Equivalently, a public good gives non-rival consumption.
The benchmark for public goods and externalities is economic efficiency. At that point, all parties maximize their total benefits. Externalities can be solved via unilateral or joint action; however resolution might be hampered by the differences in information and free riding. Likewise, the commercial provision of a public good based on being able to eliminate free riders. Excludability based on law and technology.
The markets with network externalities vary from conventional markets in many ways. Demand is not significant until a critical mass of users is established. The expectations of potential users aid to find out the attainment of critical mass. Key Concepts:
General Chapter Objectives:
A) Discuss negative and positive externalities, and their economically proficient level.
B) Describe why it is gainful to solve externalities, and how to do so.
C) Recognize network externalities and apply the idea to the Internet and e-commerce.
D) Differentiate the managerial implications of markets with network externalities from the conventional markets.
E) Discuss the idea of a public good and its economically proficient level.
F) Observe the role of technology and law in excluding users from the public good. Notes:
1) Externalities: Benchmark.
a) An externality occurs whenever one party directly (instead of through a market) conveys a profit or cost to others.
i) The existence of an externality implies the relevant market doesn’t exist.
ii) A positive externality occurs whenever one party directly conveys the benefit to others, example: additional business produced by a new store to the existing shops.
iii) A negative externality occurs whenever one party directly imposes a cost to others, example, business taken away by a latest store from the existing shops.
b) In deciding the levels of investments which give mount to externalities:
i) When the source considers only the advantages and costs to it, and ignores the advantages and costs to others, that are, ignoring the externalities.
ii) Whenever the source considers the costs and benefits of an externality to its group of members:
c) Benchmark level of an externality:
i) When one party produces both negative and positive externalities, the group maximizes gain at the following benchmark: where the sum of marginal benefits from the activity producing the externalities equivalents the sum of the marginal costs.
ii) Assume the marginal benefits surpasses the marginal cost of a positive externality, there is a gain opportunity for an intermediary to collect fees from the recipients (that is, up to their respective marginal benefits) to pay the source (that is, an amount adequate to cover the source’s marginal cost) to raise the externality.
iii) The similar benchmark applies whenever the source is separate from the recipients. 2) Resolving an externality:
a) Includes deliberate action, not accomplished via the market.
b) The merger of source and recipient of an externality.
i) Once the source and recipient of the externality are joint, no matter who acquires whom, the solitary entity will take account of all costs and benefits of its investments and invest up to the economically proficient level (that is, group marginal benefits equivalent group marginal costs).
c) Joint action: Where merger is not feasible:
i) The source and recipient of the externality could negotiate and solve the externality (whereas remaining separate entities).
ii) Then, they should enforce the agreed plan: monitoring the source and applying incentives to make sure that the source obeys with the planned level of activity.
d) Free riders:
i) A free rider is a party which contributes less than its marginal benefit to the resolution of the externality. ii) Informational differences and free-riders hamper the resolution of an externality.
Information differences on advantages make it hard to ascertain whether a recipient is bluffing (that is, claiming a lower benefit and attempting to make a smaller contribution in the joint action).
2) It might be costly to prohibit certain parties from receiving a benefit, particularly whenever the externality affects numerous recipients and the recipients vary broadly in their marginal benefits.
3) Network effects or externalities.
a) A network externality occurs whenever a benefit or cost directly conveyed to others based on the total number of other users. The adjective network emphasizes which the externality is produced by the whole network of users.
i) Network externalities describe the growth of the Internet and other communications methodologies.
ii) In the existence of network externalities, marginal benefit and demand based on price, income, prices of associated products and the total number of other users.
iii) When the network externality is not totally solved, there exist opportunities for gain from solving the difference among the sum of marginal benefits and the sum of marginal costs.
b) A network effect occurs whenever a benefit or cost based on the total number of other users. There is a market to solve the network consequence.
c) Distinguishing characteristics of markets with network externalities or effects (in respect of conventional markets).
i) In the presence of network externalities or effects, demand is not significant till a critical mass of users is established.
ii) Expectations of potential users aid to find out the attainment of critical mass. Expectations can be influenced via commitments and hype.
iii) Demand in markets with network externalities or effects is very sensitive to small differences between competition and such markets are more probable to tip.
d) The existence of network externalities or effects influences the price elasticity of demand.
i) Market demand:
ii) Relation between competing sellers:
4) Public goods:
a) There is a continuum between non-rival, rival consumption and congestible.
i) Consumption is non-rival when one person’s raise in consumption does not decrease the quantity accessible to others, that is, a public good (like fireworks).
ii) The consumption is congestible when one person’s raise in consumption by some quantity decreases the total quantity accessible to others however by less than that quantity, example: Internet usage, various forms of entertainment.
iii) Consumption is rival when one person’s raise in consumption decreases the total accessible to others by similar quantity, that is, a private good (like clothing and food).
b) Provision of a public good:
i) Content in relation to delivery:
ii) There is a great economy of scale in offering a public good. Provision includes only a fixed cost and the marginal cost of serving extra consumers or users is zero.
iii) Economic efficiency: Whenever vertical sum of marginal benefits equivalents the marginal cost. Opportunities for gain from adjusting provision are exhausted at that point.
iv) Excludability: (It is the basis for commercial provision of numerous public goods is to convey them in the format of private goods.)
In several countries, betting shops are permitted in general retail regions. A betting shop can attract a big volume of customers, who might spill over to other close by businesses. On the other hand, the existence of a betting shop might hurt toy stores and other businesses which target children and women.
a) On an appropriate diagram, state the marginal benefit and marginal cost of investment by a betting shop, the marginal benefit or cost to a bar, and the marginal benefit or cost to a toy store.
b) What rent would the owner of the shopping mall charge to a betting shop in comparison to a bank?
c) Do you expect to find comparatively more betting shops in malls or on the open streets?Answer:
a) The figure is as shown above. The bar receives a benefit, whereas the toy store acquires a cost.
b) The usual shopping mall targets families. A bank would produce positive externalities to the other stores in shopping mall. A betting shop would produce negative externalities. The mall owner would charge the betting shop a high rent than the bank?
c) On open streets, betting shops are less probable to be subject to higher rents. Therefore they tend to place on open streets instead of malls.
Latest technology based Economics Online Tutoring Assistance
Tutors, at the www.tutorsglobe.com, take pledge to provide full satisfaction and assurance in Economics help via online tutoring. Students are getting 100% satisfaction by online tutors across the globe. Here you can get homework help for Economics, project ideas and tutorials. We provide email based Economics help. You can join us to ask queries 24x7 with live, experienced and qualified online tutors specialized in Economics. Through Online Tutoring, you would be able to complete your homework or assignments at your home. Tutors at the TutorsGlobe are committed to provide the best quality online tutoring assistance for Managerial Economics Homework help and assignment help services. They use their experience, as they have solved thousands of the Economics assignments, which may help you to solve your complex issues of Economics. TutorsGlobe assure for the best quality compliance to your homework. Compromise with quality is not in our dictionary. If we feel that we are not able to provide the homework help as per the deadline or given instruction by the student, we refund the money of the student without any delay.
Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!