Ch15 - Chapter 15: Externalities Objectives: Explain how...

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Chapter 15: Externalities Objectives: Explain how externalities arise Explain why negative externalities lead to inefficient overproduction and how property rights, emission charges, marketable permits, and taxes can be used to achieve a more efficient outcome Explain why positive externalities lead to inefficient underproduction and how public provision, subsidies, vouchers, and patents can increase economic efficiency
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Externalities in Our Lives 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.
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Externalities in Our Lives The four types of externality are Negative production externalities Positive production externalities Negative consumption externalities Positive consumption externalities
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Externalities in Our Lives Negative Production Externalities Negative production externalities are common. Some examples are noise from aircraft and trucks, polluted rivers and lakes, the destruction of animal habitat, and air pollution in major cities from auto exhaust.
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Externalities in Our Lives Positive Production Externalities Positive production externalities are less common that negative externalities. Two examples arise in honey and fruit production. By locating honeybees next to a fruit orchard, fruit production gets an external benefit from the bees, which pollinate the fruit orchards and boost fruit output; and honey production gets an external benefit from the orchards.
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Externalities in Our Lives Negative Consumption Externalities Negative consumption externalities are a common part of everyday life. Smoking in a confined space poses a health risk to others; noisy parties or loud car stereos disturb others.
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Externalities in Our Lives Positive Consumption Externalities Positive consumption externalities are also common. When you get a flue vaccination, everyone you come into contact with benefits. When the owner of an historic building restores it, everyone who sees the building gets pleasure.
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Negative Externalities: Pollution Pollution is an old problem and is faced by both rich industrial countries and poor developing countries. It is an economic problem that is coped with by balancing benefits and costs.
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Negative Externalities: Pollution The Demand for a Pollution-Free Environment The demand for a pollution-free environment is expressed through the political process and this demand has increased for two reasons: Higher incomes: A high-quality environment is a “normal good,” the demand for which increases with
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This note was uploaded on 04/03/2009 for the course ECON 2102 taught by Professor Bill during the Spring '08 term at Temple.

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Ch15 - Chapter 15: Externalities Objectives: Explain how...

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