{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Lecture Notes - Externalities

# Lecture Notes - Externalities - Externalities(chapter 3...

This preview shows pages 1–3. Sign up to view the full content.

Externalities (chapter 3) Externalities: Costs or benefits of market transaction that are not reflected in prices. A third part other than buyers or seller is affected by the production or consumption. Negative externalities : Costs to the third party not reflected in the prices. Examples: pollution, smoking. Positive externalities : Benefits to the third party not reflected in prices. Examples: vaccine, fire prevention. 1. Externalities and Efficiency 1.1 Negative externalities MSC = MPC + MEC MEC (marginal external Cost) : The extra cost to the third party resulting from the production or consumption of a good or service. Assume that the paper industry is operating under perfect competition. The marginal private cost is MPC = 200 + 2Q, where Q is the quantity of paper produced per year (in tonnes). The market demand for paper is given by Q = 800 – P. The marginal external cost MEC = 150 is associated with each tonne of paper produced. Now let’s look at the market equilibrium. In the competitive equilibrium, each firm in this industry chooses output such that P = MPC. Equilibrium allocation can be solved from two equations: P = 200 + 2Q Q=800 – P P = 600 Q’ = 200 1

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Next let’s see the Pareto efficient allocation: Efficiency requires MSB = MSC.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern