Lecture_Microeconomics_Chapter15

Lecture_Microeconomics_Chapter15 - Externalities, Public...

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15 Externalities, Public Goods, Imperfect Information, and Social Choice
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EXTERNALITIES, PUBLIC GOODS, IMPERFECT INFORMATION, AND SOCIAL CHOICE market failure Occurs when resources are misallocated or allocated inefficiently. The existence of externalities, public goods, and imperfect information are examples of market failure.
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EXTERNALITIES AND ENVIRONMENTAL ECONOMICS 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 or neighborhood effects.
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EXTERNALITIES AND ENVIRONMENTAL ECONOMICS marginal social cost ( MSC ) The total cost to society of producing an additional unit of a good or service. MSC is equal to the sum of the marginal costs of producing the product and the correctly measured damage costs involved in the process of production. MARGINAL SOCIAL COST AND MARGINAL- COST PRICING
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EXTERNALITIES AND ENVIRONMENTAL ECONOMICS FIGURE 15.1 Profit-Maximizing Perfectly Competitive Firms Will Produce Up to the Point That Price Equals Marginal Cost ( P = MC )
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EXTERNALITIES AND ENVIRONMENTAL ECONOMICS Acid Rain and the Clean Air Act Acid rain is an excellent example of an externality and of the issues and conflicts in dealing with externalities. The case of acid rain highlights the fact that efficiency analysis ignores the distribution of gains and losses. That is, to establish efficiency we need only to demonstrate that the total value of the gains exceeds the total value of the losses. Other Externalities
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EXTERNALITIES AND ENVIRONMENTAL ECONOMICS PRIVATE CHOICES AND EXTERNAL EFFECTS FIGURE 15.2 Externalities in a College Dormitory
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EXTERNALITIES AND ENVIRONMENTAL ECONOMICS marginal damage cost (MDC) The additional harm done by increasing the level of an externality-producing activity by one unit. If producing product X pollutes the water in a river, MDC is the additional cost imposed by the added pollution that results from increasing output by one unit of X per period. When economic decisions ignore external costs, whether those costs are borne by one person or by society, those decisions are likely to be inefficient. marginal private cost ( MPC ) The amount that a consumer pays to consume an additional unit of a particular good.
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EXTERNALITIES AND ENVIRONMENTAL ECONOMICS INTERNALIZING EXTERNALITIES Five approaches have been taken to solving the problem of externalities: (1) government-imposed taxes and subsidies, (1) private bargaining and negotiation, (1) legal rules and procedures, (1) sale or auctioning of rights to impose externalities, and (1) direct government regulation.
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EXTERNALITIES AND ENVIRONMENTAL ECONOMICS Taxes and Subsidies FIGURE 15.3 Tax Imposed on a Firm Equal to Marginal Damage Cost
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Lecture_Microeconomics_Chapter15 - Externalities, Public...

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