Lecture 30 - Announcements HW on ch. 16 Due Monday. Next...

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Announcements HW on ch. 16 Due Monday. Next Friday we will do an Aplia experiment in class (yes I will take attendance) The prep for the experiment is graded but the experiment will not be. Ch 17 is due Monday during break (do it before you go home) We won’t get through all these slides today. 1 of 35
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Externalities There are three major critiques or objections of the market economy 1.The lack of adequate competition in some markets (monopolies, etc. which has already been covered. 2.The distribution of income generated by market economies (we’ll talk about this next) 3.Something called externalities . Externalities have gained a lot more attention since the rise of environmental 2 of 35
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3 of 35 Externalities externality A cost or benefit resulting from some activity or transaction that is imposed or bestowed on parties outside the activity or transaction. Sometimes called spillovers, third-party effects, or neighborhood effects.
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Externalities A.C. Pigou was the father of modern welfare economics. Pigou wrote in the early 20 th century, in a time where the market system reigned supreme. Economists considered the markets at that time to be both efficient (in the P=MC sense) and equitable. Pigou asked, “What would happen if there was a divergence between the private cost a firm incurs and the full social cost that society incurs from the production of the good?” 4 of 35
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Externalities Example: Say you decide to have a party in your apartment. You spend $100 on “beverages” and $50 on snacks. You also take the night off of working at Wendy’s and lose out on earning $60. Your explicit costs are $150, your implicit (opportunity) costs are $60. Your total PRIVATE economic costs are $210 . Now suppose your neighbor has an exam the next day. Your party keeps her up all night and she fails her exam. Say in order to make her feel OK about failing the exam, you would have to pay her $100 . In this case the total cost to SOCIETY (assuming she is your only neighbor) is then $210+ $100=$310 . 5 of 35
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Externalities In planning the party, you take only your private costs into account. But, the noise from your party is an externality that led to your neighbor failing her exam. Basically, the party imposed a cost on someone who was not involved in the party in any way. This is an external cost or “externality”. 6 of 35
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Externalities Not all externalities are negative. There are also things called positive externalities, but they are still market failures. Examples: Flu shots: private decision to immunize against the flu also prevents those you come in contact with from getting the flu. Education: more educated people make more informed choices that may help us all. If your neighbor paints his house and hires a landscaper to beautify his yard, this will probably increase your property value as a result of their actions “Network Effects” are a very interesting hot-topic in econ right now. They are also a form of externality. An example: if I get an X-box
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This note was uploaded on 06/21/2009 for the course ECON 2005 taught by Professor Zirkle during the Fall '07 term at Virginia Tech.

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Lecture 30 - Announcements HW on ch. 16 Due Monday. Next...

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