5.pptx - Externalities Page 1 Externalities Externalities are costs or benefits of market transactions not reflected in prices Positive externalities

5.pptx - Externalities Page 1 Externalities Externalities...

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Page 1 Externalities
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Page 2 Externalities Externalities are costs or benefits of market transactions not reflected in prices. Positive externalities are benefits to third parties . Negative externalities are costs to third parties.
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Page 3 Externalities CONSUMPTION EXTERNALITIES : impacts on third parties as a result of the consumption of a good. Eg. Each infected person who takes Drugs eliminates disease helps all of society, not Just the drug company which provides the medicine PRODUCTION EXTERNALITIES : impacts on third parties as a result of the production of a good. Eg. New discoveries & innovations impact all of Society, not just the scientist who disovers them and the firm who employs the Scientist (streptomyacin patent problem)
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Page 4 The Nature of Externalities Externalities can be produced by consumers as well as firms Externalities are reciprocal in nature Externalities can be positive Public goods can be viewed as a special kind of externality
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Page 5 Negative Externalities Negative externalities are costs to third parties other than the buyers or the sellers of an items not reflected in the market price. The situations of negative externalities also known as social costs or external costs.
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Page 6 Market Equilibrium, Negative Externality, and Efficiency D=MSB S=MPC MPC+MEC=MSC 4.5 5 100 105 110 10 Tons of Paper per Year Price, Benefit, and Cost A B G
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Page 7 Market Equilibrium, Negative Externality, and Efficiency » At first, the competitive market equilibrium is at point A at which; Efficiency requires that the full marginal cost of a good be considered in the productive decision. MPC = MSB MSC = MPC + MEC = MSB
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Page 8 Negative Externality When a negative externality exists, too much output is produced and sold in a competitive market relative to the efficient output.
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Page 9 Positive Externalities
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  • Spring '18
  • Market failure, Externality, MEB

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