From Chapter 4 to Chapter 9, we have proven that the market is usually a good way to organize the economy. Under the guidance of the invisible hand of the market, resources are allocated efficiently. For example, people can buy the paper they need, and companies will supply the corresponding paper. However, when companies produce paper, they emit dioxins, a pollutant that has been proven to increase the risk of cancer and birth defects. This behavior of both parties to the transaction not only affects each other, but also affects bystanders. If this impact does not require payment or cannot be paid, it is called an externality. If the impact is positive, it is a positive externality; if it is a negative impact, it is a negative externality.
Cars bring convenience to people’s travel, but they also cause traffic congestion and cause environmental pollution by emitting exhaust gas. Therefore, the government reduces the impact of this negative externality through emission standards and gasoline taxes.
Restoring ancient buildings can bring positive externalities to people who cycle and walk, but those who restore them cannot ask for payment from these people. The government incentivizes this behavior through income tax breaks.
The development of new technologies may be misappropriated, resulting in a lack of innovation. The government encourages innovation in new technologies by allowing inventors to operate the technology exclusively for a period of time through patents.
When barking dogs disturb the quiet that neighbors need, the government resolves this issue through designation and negotiation.
Some of the above-mentioned behaviors include situations where the parties to the transaction did not consider the welfare of bystanders, and the government must work hard to protect the interests of bystanders. For this reason, it is generally solved through public policies and private methods.
1. Externalities and market inefficiency
The market can usually allocate resources efficiently to maximize total surplus. But when the act of trading affects bystanders, like pollution. The costs of production enterprises do not include the costs of negative impacts on others, so when the market reaches equilibrium, the equilibrium quantity is greater than the socially optimal quantity. At this time, enterprises can increase total surplus by reducing production. Governments often address such problems through corrective taxes or pollution permits. Another example is the issue of education. Educated individuals may earn more income in the future labor market, but this is not the only benefit of education. Education can also bring better-quality voters and thus better governments. Education can improve people's basic qualities and make society more stable. Therefore, the value of education to society is higher than the value to individuals, so the optimal demand curve in the market should be located on the right side of the current position. Increasing the coverage of education will increase the benefits to society as a whole. This is why the state subsidizes education and provides grants.
Therefore, the market can effectively allocate resources in many cases, but when it affects bystanders, the market cannot correct this deviation. At this time, the government needs to intervene, but this intervention is also based on market thinking. of.
2. Public policy against externalities
Some obvious wrongdoings have immeasurable costs to society, such as pouring poison into reservoirs. The government targets such Conduct is expressly prohibited. The government can prohibit companies or individuals from doing things that obviously damage the public or personal interests through regulation or specifying corresponding standards. But most of the time, governments develop public policies to address externalities in the form of corrective taxes or licenses.
By taxing the behavior of negative externalities, both parties to the transaction will take this cost into account, and both the supply and demand curves will shift to the left, that is, the equilibrium quantity will move towards the socially optimal quantity. to increase total welfare. By setting a price on pollution, companies will consider their own behavior during the production process, try to reduce pollution while striving to innovate environmentally friendly technologies. When targeting behaviors with positive externalities, the government encourages them through subsidies, causing the demand curve to shift to the right to reach the socially optimal amount.
Another method that is considered better is to sell licenses. The government only needs to specify the target amount to be achieved, such as controlling pollution to no more than 600 tons, and then sell the license for 600 tons of pollution to enterprises. Companies will then decide how many pollution permits to purchase based on their own pollution costs and permit prices. In this case, the government does not need to know the pollution costs of enterprises, nor does it need to set prices. Just leave the pricing to the market. Enterprises can also improve the situation of both parties by trading pollution permits. At this time, the permit is a scarce resource that can be effectively allocated through market behavior.
Through corrective taxes and pollution permits, the government can effectively deal with externality problems. In addition, many economists point out that levying a carbon tax is a better method of tax exchange. Chapter One is that corrective taxes will not bring deadweight losses and make total social welfare greater. The second is that an increase in corrective taxes can reduce reliance on other taxes, such as income taxes, that create deadweight losses. The third is a corrective tax that levies a tax on bad behavior. It will not cause too many disputes no matter what party you belong to, and the implementation is relatively simple. For all its benefits, a carbon tax is politically unpopular. Imagine exorbitant gas taxes, cigarette taxes, etc. Would voters like it?
3. Private solutions to externalities
In addition to public policies that can solve external problems, some external problems can be solved privately. For example, moral concepts and social constraints. We have been taught from childhood not to spit everywhere, not to throw garbage, etc. These are things that are convenient for ourselves but harmful to the interests of the public. The social cost of these things It is very high and may even affect other people's trust in you. So complying with moral norms and social constraints is rational behavior. The other is private donations and charitable behaviors. The government encourages such behaviors with positive externalities through income tax exemptions. Another way is that when multiple businesses within an enterprise promote each other, they can use market behavior to conduct transactions between different internal businesses to better allocate the resources of both parties. In fact, it is similar to what Kazuo Inamori created. Amoeba business philosophy.
What we want to focus on here is the Coase theorem, which believes that if the parties to the transaction can negotiate cost-free, the market will always be able to solve the externality problem and optimize the allocation of resources. For example, if you have a dog, it often barks and threatens the quietness of your neighbors. Suppose your income from raising a dog is 500 yuan, and the neighbor's income from quietness is 800 yuan, and we think you have the right to keep a dog. At this time, the neighbor can discuss with you and give you 600 yuan to stop raising dogs, and you will happily accept it. . Then this transaction will make the situation better for both parties. In the same way, if it is stipulated that neighbors have the right to enjoy quiet, then you need to negotiate with your neighbors and pay more than 800 yuan before they can let you keep a dog. If your income from raising a dog is not that high, then it is better not to keep a dog. choice.
However, in reality, the Coase theorem is often difficult to implement. There are three main reasons. One is that negotiation involves transaction costs, such as drafting contracts. Another more common thing is that human nature is selfish and greedy. Your original benefit from raising a dog is 500 yuan, and someone gives you 600 yuan, but you want 750 yuan. Many wars and strikes have been caused because of this. Finally, if there are many interested parties and they are scattered, it will be very troublesome to organize and coordinate. If the factory is allowed to pollute, then the interests of the fishermen in the river will be harmed, and it will be very difficult to unite these fishermen to negotiate with the factory. At this time, you can approach the government. The government is an institution established for collective matters. Government representatives can usually be used to coordinate the resolution.
In summary, we see that market forces are very powerful, but they are not omnipotent. If we use the market and market-thinking policies to organize economic activities, we can achieve the purpose of allocating scarce resources and organizing coordination at low cost and with high efficiency.