Lecture 4 with MCQs [Compatibility Mode]

Lecture 4 with MCQs [Compatibility Mode] - HE191 Principles...

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E191 HE191 Principles of Economics Lecture 4 hapters 10 11 and 12 Chapters 10, 11 and 12 Principles of Economics, Fourth Edition N. Gregory Mankiw
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Externalities: An Introduction ± One of the Ten Principles: Markets are usually a good way to organize economic activity. ± Lesson from Lecture 3: Competitive market outcome maximizes total surplus and therefore efficient if markets do not fail ± One type of market failure : externalities. xternality the uncompensated impact of ± Externality : the uncompensated impact of one person’s actions on the well-being of a bystander egative externality ± Negative externality : the effect on bystanders is adverse ± Positive externality : the effect on bystanders is beneficial
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Externalities ± Externalities cause markets to be inefficient, and thus fail to maximize total surplus. ± Negative Externalities ± Automobile exhaust ± Cigarette smoking arking dogs (loud pets) ± Barking dogs (loud pets) ± Loud stereos in an apartment building ± Positive Externalities ± Immunizations ± Restored historic buildings ± Research into new technologies
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Example of Positive Externality ± Education: A more educated population benefits society: ± lower crime rates: educated people have more opportunities, so less likely to rob and steal educated people make ± better government: educated people make better-informed voters eople do not consider these external benefits ± People do not consider these external benefits when deciding how much education to “purchase” ± Result: market eq’m quantity of education too low ± How government may improve the market outcome: ± subsidize cost of education
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The market for gasoline: without negative externality The market eq’m maximizes consumer 5 P $ + producer surplus. upply curve shows 4 Supply curve shows private cost , the costs irectly incurred by sellers 3 2.50 directly incurred by sellers Demand curve shows 2 $2.50 private value , the value to buyers (the prices they are 1 willing to pay) 0 01 0 2 0 3 0 Q ( gallons) 25
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xample of Negative Externality Example of Negative Externality 5 P $ Social cost = private + external cost 4 Supply (private cost) xternal cost external ost 3 External cost = value of the egative impact cost 2 negative impact on bystanders = $1 per gallon 1 $1 per gallon (value of harm from smog, 0 01 0 2 0 3 0 Q g allons g, greenhouse gases)
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Analysis of a Negative Externality: The market for gasoline 5 P $ Private market eq’m ( Q = 25) is greater than social optimum 20) 4 S Social cost ( Q = 20). At any Q < 20, value of 3 additional gas exceeds social cost. At any Q > 20, social cost of 2 y , the last gallon is greater than its value. 1 D One solution: tax sellers $1/gallon, would shift 0 01 0 2 0 3 0 Q (gallons) supply curve up $1. 25
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“Internalizing the Externality” ± Internalizing the externality : altering incentives so that people take account of the external effects of their actions ± In the previous example, the $1/gallon tax on sellers makes sellers’ costs equal to social costs.
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Lecture 4 with MCQs [Compatibility Mode] - HE191 Principles...

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