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Unformatted text preview: 11-1-07 Econ Externality – things are other than money which can be bad and good Any valued cost or benefit resulting from any action (production or consumption) that affects someone other than the one pursuing the action. Positive Production External -Orchard and Bee keeper -New technology Consumption External -flu shot -paint house -smokes -loud music -traffic o Individual hand will not work, because externality does not work when people look for their best. Negative -factory pollution In the presence of externalities, self-interest individuals will tend to engage TOO MUCH in activities that generate negative externalities and TOO LITTLE in activities that generate positive external. o Why? Individual maximize their satisfaction by choosing level of activity such that Marginal Private Benefit = Marginal Private Cost (MPB = MPC) - To achieve social optimum, the level of activity should such that MSB = MSC (Marginal Social Benefit = Marginal Social Cost) o o Suppose MSB>MSC Not MSB<MSC - MPC + MXC = MSC (Marginal Private Cost + Marginal Extra Cost = Marginal Social Cost) MPB + MXB = MSB (Marginal Private Benefit + Marginal Extra Cost = Marginal Social Benefit) o Those two do not have to be equal to each other. - Social Optimum will not necessary coincide with the market equilibrium. • - It should be MSB = MSC but if it meets with private ones, and then we get Dead Weight Loss. (Area of Triangle) Pigo u (1 9 1 2) c a m e u p wit h s ol u tio n t o t h e e x t e r n ality pr o bl e m . o Effe c t of t a x o n pr o d u c e r s. o Wh e n t a x o n s u p ply it s hift s b a c k m e a ni n g it m e e t s t h e o p ti m al p oin t. Effe c t of s u b si dy o n Co n s u m e r By pr ovidin g s u b si dy d e m a n d c u rv e s hift s o u t w a r d a n d m e e t s t h e o p ti m al p oi n - Couse Theorem o They need no government. People can solve the problem by themselves. (Given certain situation people will look for the best situation for the optimal point.) ...
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This note was uploaded on 12/02/2009 for the course ECON econ taught by Professor For got during the Spring '09 term at UCSD.
- Spring '09
- for got