Lecture 12

Lecture 12 - Chapter 15: Externalities Problem set 2: due...

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1 Problem set 2: due Feb 11-15 Chapter 14, #1-3 and #10, pp. 341-342 Chapter 15, #2-3, p. 359 Chapter 15: Externalities A. External costs Definitions • The private costs of an activity are the costs that you personally pay for • The external costs of an activity are negative consequences of that activity for others that you don’t personally pay for •By negative consequence we refer to something they would be willing to pay to prevent if they could Example: driving your car Private costs: • gasoline • wear on car External costs: • traffic congestion • pollution But why is air pollution an “external” cost? What if I care about pollution myself?
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2 • Driving 1 more mile adds 0.1 grams of hydrocarbons to the air • 0.1 grams has a miniscule effect on the air of San Diego • My willingness to pay to have 0.1 fewer grams HC in the air is maybe one-millionth of a cent • So my personal “pollution cost” is one- millionth of a cent • But, if there are 3 million people in San Diego, the external “pollution cost” of driving my car one more mile would be 3 cents Conclusion: even if you care about pollution, the cost you impose on yourself from causing more pollution is tiny compared to the cost you impose on everybody else put together Issue with external costs: if a person just looks at their private costs in deciding
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This note was uploaded on 03/21/2009 for the course ECON 2 taught by Professor Kim during the Spring '08 term at UCSD.

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Lecture 12 - Chapter 15: Externalities Problem set 2: due...

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