Econ 539-Public Policy Analysis: Market Failures 1 - Externalities

Now that we have reviewed: the basics of choice theory and how people respond in predictable ways (in aggregate) to incentives; the basics of the free market efficiency result; the basics of economic growth; the basics of strategic behavior and the sub-optimal market outcomes that can result; the basics of data analysis and the challenge of causality; and the basic economics behind budget analysis; we are now ready to study some classical market failures. [By the way, that is a lot of basics I just listed which is a good reminder of what I am trying to accomplish in this class: a good intuitive understanding of the logic of economics and how it applies to policy]

Today we will study the most talked about market failure: externalities.

These are most often discussed in environmental policy but can be both positive and negative and can arise anywhere. We will study how the presence of externalities - costs and benefits that do not accrue to the agent engaged the the particular economic activity - can lead to inefficient market outcomes and the policy perscriptions to deal with externalities. We will also take a closer look at pollution in particular and talk about the difference between Pigouvian taxes, strict caps and cap-and-trade.

For examples we will have a look at Portland's Business Improvement District, the US Department of Energy's Weatherization Assistance Program and the Ash Grove cement plant.