Chap_12 - Chapter 12 Externalities And Property Rights...

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Chapter 12 Externalities And Property Rights Purpose: This chapter is about the difference between efficiency at the firm or individual level and efficiency at the social level. External effects are shown to cause gaps between a private optimum and a social optimum. Positive and negative externalities are considered to show that in either case, an externality makes a private optimum inefficient from a social point of view. Externalities lead to the Coase Theorem which in turn leads to an introduction and treatment of property rights. The relationships between property, externalities, and efficiency are shown through examples and a discussion of the tragedy of the commons. The final few pages of the chapter use technical terms to explain several common cultural and economic situations that either cause or are caused by externalities. Length: XX pages Time required to read: Longer than for most previous chapters. The theories and examples are useful and interesting, but several sections of the chapter require intense concentration. The narrative can be read in little more than one hour, but true understanding will likely require three hours plus the lectures. Number of lectures requires for understanding: Allow two. One for externalities and one for property rights and one to work through examples and problems associated with either of these topics. Summary An introduction based on TV advertising is used to introduce externalities as “activities that generate costs or benefits that accrue to people not directly involved in those activities.” The text moves immediately to the effects of externalities on resource allocation. Honeybees provide a real world explanation of the negative externalities (stings) and positive externalities
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(pollination) that come from honeybee activity. These are re-cast in terms of shifts in supply curves and demand curves. The Coase Theorem offers an explanation of moving to a social optimum in the face of externalities. The theorem is based on communication and coordination between the creator and the recipient of the externality. It operates in the presence of either external costs or external benefits. Complex examples are used to make this point, and to show that a policy of complete eradication of negative externalities is economically foolish. Property and property rights are introduced as institutions (rules) that help govern the distribution of rewards stemming from the use of property or other assets. Unpriced resources such as a common area lead to overuse and degradation of resource quality while private ownership can lead to efficient use of resources. Examples of impractical uses of the institution of property are provided. Positional externalities are used to explain the relationship between actual performance (“I
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Chap_12 - Chapter 12 Externalities And Property Rights...

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