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073107 - 1 Impose a tax equal to the marginal external cost...

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Sheet1 Page 1 ------ Externalities: External costs - A cost imposed on someone who was not part of the action which created the cost. External benefits - A benefit enjoyed by someone who was not part of the activity which created the benefit. Marginal Social Cost (MSC) = Marginal Cost to the Producer (MC) + Marginal External Cost Therefore, the supply curve always reflects the cost cost paid by the producer (S=MC) and the demand curve always reflects The distance between a quantity and the point reflected on supply reflects the cost. MC MSC Beef Beef Workers Workers Capital Capital [Missing Water cost] The MSC will be higher than the MC curve because of theadditional cost of polluted water. MSC is always greater than the MC For the example above (hot dog factory), there is no external benefit. Even though there is the MSC curve, the equilibrium am In this case, government intervention may be beneficial. The government could:
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Unformatted text preview: 1) Impose a tax equal to the marginal external cost 2) Impose an emission charge equal to the marginal external cost This causes a shift of the supply curve to match the MSC curve. Equilibrium now equals efficient quantity. Since two factories (Oscar Mayer, which is polluting the water on the river, and Coors, which is using the now polluted water) a Coase Theorem: If the number of involved parties is small so that the transactions costs of reaching an agreement is small an d Marginal Social Benefit (MSB) = Marginal Benefit to the Consumer (MB) + Marginal External Benefit D = MB, MSB is higher than D, producers will produce at equilibrium, but the efficient amount is at the intersection of MSC an d The Coase Theorem could apply here. Government could also intervene: 1) Subsidy (losers cost for producers so increases supply) 2) Voucher (lowers cost for consumers so increases demand)...
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