ECON1 - 0424

ECON1 - 0424 - Econ 1 Dealing with Global Warming -...

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Econ 1 4/24/2009 Dealing with Global Warming - Proposed solutions involve government intervention in market - Quotas on CO2 emissions - Marketable pollution permits - But competitive market maximizes total profits - How do we think about such interventions? Externalities - Trade has benefits for buyer and seller - In case of pollution, trade between two parties imposes damages on other parties - Experiment 6 Example: Air pollution - Other examples: traffic congestion (negative externality) house painting (positive externalitiy) Externalities and Markets - If externality, market may not maximize total profits - Market may not be efficient The isle of Effluvia - The dark side of Effluvia: each ornament manufactured imposes $0.40 of air pollution damage on each Effluvian Externalities and Trade - Each trader counts only his/her profits - But, each trade imposes $20 external cost - If profit to buyer and seller are less than $20, trade decreases total social profit - Competitive trading results in too many trades
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ECON1 - 0424 - Econ 1 Dealing with Global Warming -...

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