Class14_04 - 14/04/2008 Class Notes (cover Chapter 13 in...

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14/04/2008 Class Notes (cover Chapter 13 in the textbook) Class Outline Externalities Externalities Def. Externality An externality is a cost or benefit that arises from production and falls on someone other than the producer, or a cost or benefit that arises from consumption and falls on someone other than the consumer. A negative externality imposes a cost and a positive externality creates a benefit. So the four possible types of externality are: Negative production externalities Positive production externalities Negative consumption externalities Positive consumption externalities Negative Production Externality Example A Chemical firm dumps waste on river. Along polluted river houses are rented at lower price: the firm creates a negative externality on landlords. When a production externality arises the private costs are different from social costs! 1
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Def. Marginal Private Cost (MC) The marginal private cost ( MC ) is the private cost of producing one more unit of a good or service. Def. Marginal External Cost of Production Marginal external cost is the cost of producing one more unit of a good or service that falls on people other than the producer. Def.
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This note was uploaded on 04/29/2008 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue University-West Lafayette.

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Class14_04 - 14/04/2008 Class Notes (cover Chapter 13 in...

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