Notes Section 27, Econ 100A Spring 06
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Covering material from Lecture on May 2nd
Section Notes 27
Class Outline
1. Externalities
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Externalities
An externality is an eect from a market transaction on the welfare of an individual that is not accounted for in the market transaction. These external eects can either be positive or negative. For positive externalities, the market (private) equilibrium production level is usually less than the socially optimum, and for negative externalities, the market equilibrium production is usually more than the socially optimum. Problem: (Pindyck & Rubinfeld, Chapter 18, Exercise 7) In a market for dry cleaning, the inverse market demand function is given by P = 100Q and the (private) marginal cost of production for the aggregation of all dry-cleaning rms is given by MC = 10 + Q. Finally, the pollution generated by the dry cleaning process creates external damages given by the marginal external cost curve MEC = Q. a. Calculate the output and price of dry cleaning if it is produced under competitive conditions without regulation. b. Determine the socially ecient price and output of dry cleaning. c. Determine the tax that would result in a competitive market the producing socially ecient output. d. Calculate the output and price of dry cleaning if it is produced under monopolistic conditions without regulation. e. Determine the tax that would result in a monopolistic market producing the socially ecient output. f. Assuming that no attempt is made to monitor or regulate the pollution, which market structure yields higher social welfare?
Section Notes 27, Econ 100A Spring 06
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Problem: (Pindyck & Rubinfeld, Chapter 18, Exercise 8) A beekeeper lives adjacent to an apple orchard. The orchard ownder benets from the bees because each hive pollinates about one acre of apple trees. The orchard owner pays nothing for this service, however, because the bees come to the orchard without his having to do anything. Because there are not enough bees to pollinate the entire orchard, the orchard owner must complete the pollination by articial means, at a cost of $10 per acre of trees. Beekeeping has a marginal cost of MC = 10 + 5Q, where Q is the number of beehives. Each hive yields $40 worth of honey. a. How many beehives will the beekeeper maintain? b. Is this the economically ecient number of hives? c. What changes would lead to a more ecient operation?