Public Finance Lecture 4_Externalities and Public Policy - Public Finance Lecture 4 Externalities and Public Policy Public Finance Externalities I What

Public Finance Lecture 4_Externalities and Public Policy -...

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Public Finance
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Lecture 4: Externalities and Public Policy Public Finance
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Externalities I - What are externalities ? II - Externalities and efficiency III – Internalization of externalities 1- Corrective taxes 2- Second best efficiency solutions 3- Corrective subsidies 4- Property rights and Coase Theorem 5- Efficient abatement level 6- Regulatory solutions
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I- Externalities Externalities are costs or benefits of market transactions not reflected in prices. Negative externalities are costs to third parties. Positive externalities are benefits to third parties . Real and pecuniary externalities
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II- Externalities and Efficiency The marginal external cost is the dollar value of the cost to third parties from the production or consumption of an additional unit of a good. This occurs when there is a negative externality .
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Social Costs MSC = MPC + MEC Marginal Social Cost = Marginal Private Cost + Marginal External Cost
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Figure 3.1 Market Equilibrium, A Negative Externality and Efficiency D = MSB
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  • Summer '18
  • Nisar Alam
  • Externalities, Market failure, Externality, MEC

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