Econ textbook part 7: : Chapter 11: Externalities and Public Goods

Tl;dr I'm puzzled over how to score this one. The basic concept of externalities is not reliant on any particular production set shape of course. The analysis in this chapter consists of relaxing assumption after assumption and eventually gets to relaxing the convexity assumption.

Part 1, including the important, though incomplete, reasons why you shouldn't waste your time on this.

Part 2

Part 3

Part 4

Part 5

Sorry for the long delay, I was writing a couple of humorous speeches and that took most of my spare intellectual energy. Then I got stuck summarising the last section of this chapter.

Objective to check out the truth of Themountaingoat’s assertion that:

practically everything in undergraduate microeconomics is based on the idea that businesses face increasing marginal costs after a certain point.

Part A: Introduction

This chapter begins the study of market failures, where some of the assumptions behind the first and second fundamental theorems of welfare economics don’t hold. This chapter focuses in particular on externalities and public goods. Appendix A focuses on the connection between externalities and the presence of technological non-convexities.

11.B notes that externalities are surprisingly hard to define, it offers up a simple definition but immediately complicates it by excluding pecuniary externalities.

This section uses a partial equilibrium model, where there are two consumers (or firms) and their actions don't affect prices of traded goods.

The traditional solutions to externalities are quotas (a cap in the case of negative externalities) or taxes (the taxes can be subsidies, including subsidies to reduce output). These two are equivalent if a government has extensive information, the textbook notes that in reality governments generally don't.

Another potential solution to externalities -  Coase's of assigning property rights - is discussed along with some problems with it.

11.C Public Goods

A public good is defined as “a commodity for which the use of a unit of the good by one agent does not preclude its use by other agents.” This definition doesn't mention the non-excludable criterion, the textbook notices this in the next paragraph and states that this section will focus on non-excludable public goods.

The rest of the section is the standard stuff about inefficiency of public goods provision.

11.D Multilateral Externalities

Expands analysis to externalities that affect more than two parties. Distinguishes between depletable externalities (e.g. if I dump toxic waste on your land that reduces the toxic waste I can dump on someone else's), and non-depletable externalities (e.g. global warming). Depletable externalities can be resolved efficiently if property rights are well-defined, non-depletable externalities can't, but given adequate information a government could by imposing taxes or quotas.

11.E Private Information and Second Best Solutions

In practice the degree by which an agent is affected by an externality often depends on information known only to that agent. Bargaining, taxes and quotas are all potentially inefficient in this situation. And taxes and quotas are no longer perfect substitutes for each other.

More general policy instruments, that allow for some variation in consumer's cost, are discussed briefly, with the example of a tax-subsidy scheme (Groves-Clarke mechanism).

Appendix A discusses non-convex preference and production sets. Example 11.A. A.1 discusses positive externalities as a source of increasing returns.

Example 11.A A.2 discusses how negative externalities can induce non-convexities and that this creates problems for centralised and decentralised solutions.

Example 11.A.A.3 discusses externalities as a source of multiple local social optima.

In summary, I'm puzzled over how to score this one. The basic concept of externalities is not reliant on any particular production set shape of course. The analysis in this chapter consists of relaxing assumption after assumption and eventually gets to relaxing the convexity assumption. Any arguments, opinions, one way or another?