Quiz5Notes - Externalities 9/28/2007 10:12:00 AM...

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Externalities 28/09/2007 09:12:00 Externality:  the uncompensated impact of one person’s actions on the well  being of a bystander.  May be positive: education Or negative: pollution EXTERNALITIES AND MARKET EFFICIENCIES Welfare economics, a recap The height of the demand curve represents the willingness to pay of the  marginal buyers, also described as the value to the consumer of the last unit  of aluminum bought. The height of the supply curve represents the cost to the  marginal seller, also described as the cost of the last unit of aluminum sold.  Q MARKET  = market equilibrium Q OPTIMUM  = optimum equilibrium  Negative externalitites The cost to society of producing a good Social cost = private cost of producing a good + external cost For the benevolent social planner, Q OPTIMUM  is where the demand curve  crosses the social-cost curve which move to the left.  The equilibrium quantity is larger than the socially optimal quantity, because  the marginal consumer values aluminum at less than the social cost of  producing it.  Internalizing the externality:  alternating incentives so that ppl take account  of the external effects of their actions.  Positive externalities More educated population leaving to more informed voters, and thus better  govnt, lower crime rates, development and dissemination of technological  advances.  Social value is greater than private value so demand curve shifts to the right.  To move market eqm to optimal eqm, subsidies are requires. 
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Case study: technology spillovers
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Quiz5Notes - Externalities 9/28/2007 10:12:00 AM...

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