B200.F08.W08.Ext.PublicGood

B200.F08.W08.Ext.PublicGood - Market Efficiency &...

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Externalities (Chapter 10)
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Externalities  Some Transactions affect other  people than the Buyers and  Sellers
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Negative Externality in  Consumption $ Price x Qty x /T Dx Sx $Pe Qe Dx $Pe’ Qe’
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Negative Externality in  Production $ Price x Qty x /T S x $Pe Qe $Pe’ Qe’ S x True MC D x
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Solutions to Negative  Externalities Internalize the Externality Problem : Market overproduces relative to  optimum Solution : Reduce output to optimum Tax buyers (reduced demand    reduces  Qty.) Tax Sellers (reduces supply   reduces  quantity)
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Positive Externality in  Consumption $ Price x Qty x /T Dx’ Sx $Pe’ Qe’ Dx $Pe Qe
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Solutions to Positive  Externalities Internalize the externality Problem : Market under-produces relative  to optimum Solution : Increase output to optimum Subsidize buyers (Increase demand     increase Qty.) Subsidize Sellers (Increase supply    increase quantity)
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Private Solutions to Externalities Types of private solutions: moral codes and social sanctions,  e.g.,  the “Golden Rule” charities,  e.g.,  the Sierra Club contracts between market participants and  the affected bystanders
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“The Fable of the Bees” Written in 1732 by Bernard Mandeville Millions endeavouring to supply  Each other’s Lust and Vanity … ( Fable  i.  18).  Thus every Part was full of Vice,  Yet the whole Mass a Paradise … (i. 24). The bees, however, are not satisfied to have their  viciousness (self-interest)mixed with their prosperity  and pray the gods for honesty. This raises the  indignation of Jove, who unexpectedly grants the  hive its wish.
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BUT, Oh ye Gods! What Consternation,  How vast and sudden was th’ Alteration! (i. 28).  As Pride and Luxury decrease,  So by degrees they leave the Seas. …  All Arts and Crafts neglected lie;  Content, the Bane of Industry,  Makes ’em admire their homely Store,  And neither seek nor covet more (i. 34–5). In this way, through the loss of their vices, the 
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This note was uploaded on 11/18/2008 for the course BUAD 200x taught by Professor Hergenrather during the Fall '05 term at USC.

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B200.F08.W08.Ext.PublicGood - Market Efficiency &...

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