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Unformatted text preview: Sheet1 Page 1 Notes 4/8/08 Chapter 17: Market Failures: Problem Grid and Externalities Externalities- the market fails because the transaction affects somebody outside of the market. Can be good (positive externality) or bad (negative externality) Production externalities: Negative - pesticide use caused pollution. <- expand to read. Social supply curve is equal to the marginal cost of producing the products to the private individual plus the supply cost that is Ss=MCp + MCe= sum of private and external MC Social optimum has higher prices and lower quantity than the market equilibrium p Policy goal- how we get from the market equilibrium to social optimum one way to accomplish: have the government tax transaction (internalizing the externality) <- expand to read bigger quantity- more positive externalities lower price- consumers rewarded Internalize the Externality- subsidize production....
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