PAM_2000_Fall_2008_Chapter_18 - Title: Mercy Mercy Me (The...

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1 • Title: Mercy Mercy Me (The Ecology) • Artist: Marvin Gaye • Economic concept: negative externalities in production (pollution) • Representative lyrics: Where did all the blue sky go? Poison is the wind that blows… Oil wasted on the oceans and upon our seas; fish full of mercury… Radiation in the ground and in the sky, animals and birds who live nearby are dying… Oh, mercy mercy me. Oh, things ain't what they used to be PAM 200: Intermediate Microeconomics Prof. John Cawley Chapter 18: Externalities, Commons, and Public Goods
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2 Where We Are Consumer Theory Individual Demand Market Demand Theory of Production Costs of Production Perfect Competition Imperfect Competition: Monopoly Monopolistic Competition Oligopoly Prices General Equilibrium Market Imperfections Factor Markets Strategy Game Theory Outline • Externalities • Inefficiency of Competition With Externalities • Internalizing Externalities • Allocating Property Rights to Reduce Externalities • Common Property • Public Goods
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3 Theorem of the Invisible Hand Under perfect competition, utility-maximizing behavior on the part of individuals together with profit-maximizing behavior on the part of firms leads to a Pareto-efficient outcome …except in cases of market failure; e.g.: – Externalities – Asymmetric information Externality Externality : one agent’s consumption or production affects another agent directly (not simply through prices); this leads to inefficiency Two types of externalities: 1. Negative externalities Your loud music irritates your neighbors Your driving during rush hour adds to congestion experienced by others 2. Positive externalities Your neighbors enjoy looking at your garden Beekeeper’s bees fertilize neighbor’s flowers
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4 Pecuniary Externality Pecuniary externality : one agent’s consumption or production affects another agent indirectly through prices; examples: Second firm enters monopoly market, drives down price, lowers profit Immigration increases labor supply, drives down wage We aren’t concerned with pecuniary externalities because they cancel out: one agent’s loss is another’s gain, affects equity but not efficiency From now on, when I use term externality, I mean non-pecuniary externality, which impacts efficiency Private vs. Social Costs • Private costs: cost to firm of production – Wages, interest on borrowed capital, materials – Represented by marginal cost (MC) curve • Social costs: total cost of production – Private costs + any external costs – Represented by new curve: marginal social cost (MSC)
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5 Private vs. Social Benefits • Private benefits: utility derived by consumer from good or service that was purchased – Represented by demand curve • Social benefits: total benefits of consumption – Private benefits + any external benefits – Represented by new curve: marginal social benefit (MSB) Externalities Result in Inefficiency in Competitive Markets
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This note was uploaded on 05/30/2009 for the course PAM 2000 taught by Professor Evans,t. during the Spring '07 term at Cornell University (Engineering School).

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PAM_2000_Fall_2008_Chapter_18 - Title: Mercy Mercy Me (The...

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