Lecture 04-3 - Industrial Growth& CompeTTon Lecture III...

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Industrial Growth & Competition Lecture III - Conclusion Friday, October 21, 2016 Bjoern Hartig
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Externalities Problems with the Coase theorem: Free-riding If groups are big, some group members may free ride on the efforts of others. For example, the noise at an airport affect all residents more or less equally. But organizing a local initiative against night flights and negotiate with the airport has high transaction costs (mosty time and stress). Many people rather let others do the work, but reap the same benefits. 2
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Externalities Problems with the Coase theorem: Fairness / Justice The efficiency outcome may not be desirable from a normative standpoint. Even if it is efficient to let a factory pollute the environment / evict residents to build a highway / let a multinational firm exploit natural resource instead of the local residents, etc., maybe we don‘t want a society where those things are allowed. 3
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Read Life Example Guardian Headline on the 4th August 2010: Ecuador signs $3.6bn deal to not exploit oil-rich Amazon reserve [emphasis mine] Ecuador found vast oil reserves in the Yasuni national park (Amazonian rain forest) worth $7bn Then asked rich countries to pay so Ecuador would not exploit it. Source: http :// 4 Image: Andreas Kay
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Essay Practice - Optional 500 words about an externality in everyday life (or in a book, comic or movie etc.). Analyse everything! Who is involved in the main transaction? What are their objectives? Who is affected by the externality and how exactly? Where is the inefficiency? What are the available solutions? What is the Coase solution? Is it attainable? Why or why not? Submit on Moodle, no hardcopy necessary. 5
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Essay IMPORTANT!!! DO NOT write about factories, pollution, bees or any other standard example from economics textbooks. If I see something that looks like a textbook example, I will treat your essay as plagiarized ! DO NOT use Google translator or similar services. This is incomprehensible. Write your own text!!! Make an effort! Failure to do so will be treated as a missed assignment. Everyday life examples only! Find inspiration in Dan Hamermesh’s book Economics is Everywhere! 6
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A very good question What do externalities have to do with the existence of firms? Firms can exploit positive externalities by internalizing them. E.g. comparative advantages due to specialization can often be extended to other products or markets. Increasing the firm’s product line-up. Benefits that would be undersupplied by the market can be produced efficiently inside the firm. 7
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Applications Example: Du Pont Explosives manufacturer Best seller: smokeless powder Dramatic expansion after 1914 due to WWI Excess manufacturing facilities after 1918 Started selling fertilizer Similar technology and know-how (nitrogen-based chemistry) Very different customer base Establishment of separate divisions 8 Image: Ron Cogswell
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