review 20 - ECONOMICS 2302 Principles of Microeconomics Dr...

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ECONOMICS 2302 Principles of Microeconomics Dr. Susan Williams McElroy UT-Dallas REVIEW SHEET FOR Chapter 16 Chapter 16 Externalities, Public Goods, Imperfect Information, and Social Choice Concepts, terms, and definitions to know: drop-in-the-bucket problem externality free-rider problem marginal damage cost (MDC) marginal private cost (MPC) marginal social cost (MSC) market failure public goods (social or collective goods) mixed good nonexcludable nonrival in consumption optimal level of provision for public goods Chapter 16 examines additional causes of market failure. Government involvement will not always improve matters. Just as markets can fail, so can government. Externalities and Environmental Economics An externality is a cost or benefit resulting from some activity or transaction that is imposed or bestowed on parties outside the activity or transaction. Externalities are also called spillover or neighborhood effects . Pollution is a well-known example of a negative externality, but remember that some externalities positive externalities. Examples include flu vaccinations and education. Think about why both flu vaccinations and education have external benefits (also called spillover effects). Another example of a positive externality is hiring my next door neighbor to paint my house. It happens he is a professional painter so he knows what he’s doing. But there’s an external benefit to his property values in making my house look nice. I like to think that he gives the job a little more care and attention. In essence the two of us have internalized an externality. Marginal Social Cost and Marginal Cost Pricing: If external costs are not taken into account there will be overproduction of the product imposing the external costs. Marginal social 1
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cost ( MSC ) is the total cost to society of producing an additional unit of a good or service. MSC is equal to the sum of the marginal costs of producing the product plus the correctly measured damage costs caused by the production. 1. Acid Rain and the Clean Air Act: This case highlights the fact that efficiency analysis ignores the distribution of gains and losses. 2. Other Externalities: The list is long. Be sure to mention congestion, the global warming hypothesis, and second-hand smoke. Not all externalities are negative. Private Choices and External Effects: Decisions that ignore external costs are likely to be inefficient. 1. Marginal private cost ( MPC ) is the amount that a consumer pays to consume an additional unit of a good or service. For those students who have already taken Principles of Macroeconomics, note that that this MPC is not the same as the marginal propensity to consume. 2.
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review 20 - ECONOMICS 2302 Principles of Microeconomics Dr...

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