Lecture 13 - Chapter 15 Externalities A External costs 1 My...

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1 Chapter 15: Externalities A. External costs
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2 My private marginal cost is what I personally pay My external costs are negative consequences imposed on others for which I don’t have to pay (example, air pollution) External marginal cost is added to private marginal cost to get social marginal cost Social optimum requires social marginal benefit = social marginal cost Perfect competition results in private marginal benefit = private marginal cost With external costs (also called “negative externalities”), too much of the activity is undertaken
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3 Chapter 15: Externalities A. External costs B. External benefits My private marginal benefit is what I personally receive My external benefits are positive consequences received by others for which I don’t get any compensation (example, bees?) External marginal benefit is added to private marginal benefit to get social marginal benefit
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4 Social optimum requires social marginal benefit = social marginal cost Perfect competition results in private marginal benefit = private marginal cost With external benefits (also called “positive externalities”), too little of the activity is undertaken Chapter 15: Externalities A. External costs B. External benefits C. Dealing with externalities 1. Property rights and the Coase Theorem
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5 Owner of apple orchard would gain $50 if beekeeper located another
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