This is a 35-minute module that introduces students to negative externalities and corrective taxes as a solution. This module has the following learning objectives:
This module is built for classes below 100 students. For classes of 100 students or more we recommend increasing the market size to 20 students per market. This will alter the equilibrium predictions and the instruction comprehension questions.
MobLab divides students into 12-person markets (6 buyers, 6 sellers) in each of the three sessions in this module (one for practice and two for real). In every round of trading, a seller can sell—one at a time—up to three “Robot Dogs”, and a buyer can buy—one at a time—up to three “Robot Dogs”. The value of a Robot Dog to a buyer decreases across his three units, while the seller’s cost increases across her three units. While these canines have many great qualities their barking creates a nuisance cost to the community of $2.40 per dog transacted. This per-dog nuisance cost reduces each person’s payoff by 20 cents.
In the absence of externalities a seller with Seller Cost $C who sells an Robot Dog for price $P earns a payoff of $P – $C, and a buyer with Buyer Value $V who buys a Robot Dog at price $P will get profits of $V – $P. A student’s payoff for the round is the summation of her payoffs from each of her transactions. However, in this setting there are externalities. Therefore, the total payoff will be the sum of surplus from all transactions minus the nuisance cost. This nuisance cost is $2.40 per dog and is shared equally by all 12 market participants. Therefore, Q*($2.40/12)= Q*($0.20). Without intervention equilibrium price is $3.64 and there are 15 units transacted. With a per-unit tax equal to the social cost ($2.40) the equilibrium price is $5.27 and there are 7 units transacted.
(Figure 1: Typical Market Results with Negative Externalities. Click to expand)
(Figure 2: Typical Market Results with Negative Externalities and Corrective Tax Click to expand)