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Chapter 10 – ExternalitiesPrivate cost= price paid by consumerExternal cost=cost to 3rdpartySocial Cost= Private Cost + External CostSocial Surplus= consumer surplus + producer surplus + everyone else’s surplusPositive Externalities are social benefits (environmentally friendly cars)Negative Externalities are social costs (pollution, etc.)Coase Theorem: if transaction costs are low and property rights are well defined then producers and consumers will negotiate to find the efficient price that can be agreed upon by both partiesPigouvian Taxes: a tax on a good with external costPigouvian Subsidies: subsidy on a good with external benefitsTradable Permits: setting a maximum quantityA company can trade an allowable pollution amount for $ if they reduce their own pollution at a lower price than the first company. This is accepted because it does not affect the environment and still makes a profit. Command and Control: Raising prices and lowering consumption, this is hard to regulate because the way in which people reduce their consumption is varied (ex. electricity) better solved with a taxChapter 12 – Invisible HandProperties:1.By maximizing profits and producing where P=MCfirms minimize total costs2.By maximizing profits and responding to profits inmarket or industry, firms are assuring that resourcesare moving to their most productive use and thebalance of industries is efficientCost Minimization: Overall costs will be lowered when MCA =MCB if MC at all firms is equal