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ARE201Lecture12aNotes

ARE201Lecture12aNotes - Lecture 12 Externalities 1 Market...

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Lecture 12: Externalities 1. Market failure occurs when an action creates costs or benefits to others, and the creator of the action is not charged for the cost or paid for the benefit. Examples: You drive a vehicle (action) which emits some pollutants, but you don't directly pay for the costs of the pollution You smoke a cigarette (action) while driving and other passengers cough from the second hand smoke, but you don't pay for their discomfort You get a flu shot (action) and therefore reduce the chances of your friends catching the flu, but they don't pay you for the benefit they receive My neighbor plants azaleas (action) and I enjoy their beauty and fragrance, but I don't pay my neighbor for this benefit 2. Definitions Externality: the resulting cost or benefit from an action that isn't fully considered by the person or business creating the action Negative externality: occurs when the action creates costs to others, and the creator of the action is not charged for the costs Positive externality:
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