Econ 100.

2
Discussion Class 9
3/15/18
JC Punongbayan
 Outline
• Housekeeping:
– Exam 2: Mar 18, 9-12 NN, rooms TBA
• Externalities (cont.)
– Private solutions
• Public goods & common resources
– Game!
 Public solutions to externalities
• Quantity restrictions also work (e.g., pollution permits)
 Private solutions to externalities
• Gov’t is not the sole
source of corrections for
externalities.
– E.g., Moral codes (Golden
Rule).
– E.g., Railroad tracks, crops,
and sparks.
– E.g., Contracts/property
rights.
• What is the Coase theorem?
 Exercise #1
Assume that Ellen’s roommate Miriam is quite
messy. Suppose Miriam gets a P250 benefit from
being messy, but it imposes a P500 cost on Ellen.
Suppose further that Miriam has the property
right to be messy.
• The Coase theorem would suggest that an
efficient solution would be for Ellen to pay
Miriam at least __ but no more than __ to
clean up after herself.
Philippine jurisprudence and externalities

• Henares vs. LTFRB [2006]

– Negative externality: Air
pollution
– Petition: Requiring public utility
vehicles to use compressed
natural gas as alternative fuel.
– Court decision: A policy or law
requiring owners of motor
vehicles to use compressed
natural gas must first be passed
by Congress; i.e., the Court
cannot usurp the functions of
Congress in policymaking.
Philippine jurisprudence and externalities
• Social Justice Society vs.
Atienza [2008]
– Negative externality: Health
and environmental hazards of
oil refinery operations and
terminals in the middle of
Manila.
– Petition: Compel the mayor of
Manila to enforce an
ordinance ordering the
removal of oil terminals.
– Court decision: The local
government of Manila had the
power to enact the ordinance.
Philippine jurisprudence and externalities
• MMDA vs. Concerned Citizens of
Manila Bay [2008]
– Negative externality: Pollution in
Manila Bay.
– Petition: Compel government
agencies to clean Manila Bay in
general (not just specific pollution
incidents) and lay down a concrete
plan to carry out this order.
– Court decision: The government
agencies in question are enjoined
to perform functions related to the
“cleanup, rehabilitation, protection,
and preservation of the Manila
Bay”.
 Tragedy of the commons
• Which goods and services have externalities?
– Rival goods
– Excludable goods Exercise 2: Classify the
following.
• Netflix shows
Excludable Nonexcludable • Ramen
• Congested NLEX
Private Common • Uncongested NLEX
Rival goods goods • The environment
• Philippine National
Nonrival Club Public Police
goods goods • PAGASA weather
bulletins
• Fish in the ocean
 Tragedy of the commons
• “Common” grazing lands in the UK.
• Nonexcludable + rival = tragedy of the
commons.
– Arises if there’s no way of establishing who owns
which, and it’s uncertain which resources you can
own and use for yourself.
– E.g., Ideally, we maximize resources for all.
Actually, each person overuses the resource,
leading to depletion.
 APPLICATION

How do we save endangered species?

• Why is the cow not extinct?
What about the elephants and
rhinos?
• Sas-Rolfes [2011]:
– “Before 1991, all wildlife in South
Africa was treated by law as res nullius
or unowned property. To reap the
benefits of ownership from a wild
animal, it had to be killed, captured, or
domesticated.
– This created an incentive to harvest,
not protect, valuable wild species—
meaning that even if a game rancher
paid for a rhino, the rancher could not
claim compensation if the rhino left his
property or was killed by a poacher....
 APPLICATION

How do we save endangered species?

– New piece of legislation: the Theft
of Game Act of 1991.
– This policy allowed for private
ownership of any wild animal that
could be identified according to
certain criteria such as a brand or
ear tag.
– The combined effect of market
pricing through auctions and the
creation of stronger property rights
over rhinos changed the incentives
of private ranchers. It now made
sense to breed rhinos rather than
shoot them as soon as they were
received.”
 Game!
1. Each of you can contribute any amount from P0 to
P10.
2. For 3 minutes you can talk between yourselves
about how much to contribute.
3. After 3 minutes no more interaction is permitted.
4. I’ll go around the room and collect your
contributions.
5. Whatever is the total, I will increase it by 20%, and
the resulting sum will be divided equally among the
class.
 Public goods game

Player 2
Contribute Free ride
Contribute 60, 60 –20, 80
Player
1 Free ride 80, –20 0, 0
 Climate change game
(Atmosphere as a global public good)

Developing countries
Abate Pollute
Abate 10, 10 0, 11
Developed
countries Pollute 11, 0 1, 1
How to pay for the public good?

(1) Truthful revelation

• A pays $11, B pays $6, C pays $1.
• All benefit from the public good (90 units)
but A pays more than the rest.
• So lie about valuations. This shifts
demand curve to the left, leading to
underprovision of the public good.
(2) Split cost equally
• Divide total cost of $18 by 3, so each pays
$6.
• But why will C pay $6 if he values it only
at $1?
• Underprovision again.
(3) Who needs it most?
• If A needs the public good badly, he pays
up the marginal cost of $18.
• But B and C can just free-ride on this
amount, so won’t pay.
• Underprovision again.
 Importance of property rights
• For non-excludable goods (common goods, public
goods) interaction between people is non-
cooperative and not optimal (tragedy of commons
and free-rider problem).
– Cooperation is difficult sometimes and often not optimal!
• Hence, there is room for government intervention.
– In commons problem, define property rights (so they
don’t overuse resources).
– In public goods problem, levy taxes (so they don’t free-
ride).