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Unformatted text preview: 1 Externality Externality u externality u the cost of producing a good or the benefits from consuming a good spill over to those not producing or consuming the good u externalities in production and consumption u positive and negative externalities Negative Externality Negative Externality MC Quantity ($) PRIVATE D (MARGINAL BENEFIT) Q C MC SOCIAL u marginal external costs- additional costs incurred by society that firms don’t pay for u marginal social cost – costs to firms and others u equilibrium output where Q D =Q S u market supply reflects marginal private costs = marginal private costs + marginal external cost Reduction in Social Cost MC SOCIAL MC Quantity ($) PRIVATE D (MARGINAL BENEFIT) Negative Externality Negative Externality u too much of the good is produced u competitive outcome is not efficient u efficient level of output - marginal social cost is equal to marginal benefit Q * Reduction in Social Benefit Q C Q 1 2 MC SOCIAL DeadWeight Loss Negative Externality Negative Externality MC Quantity...
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This note was uploaded on 10/10/2009 for the course ECON 101 taught by Professor Gerson during the Winter '08 term at University of Michigan.
- Winter '08