8-Externalities

8-Externalities - Externalities Econ 382 Brennan Platt,...

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Externalities Econ 382 Brennan Platt, Ph.D.
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Crucial Skills Models: •Externalities in partial equilibrium •Externalities in general equilibrium Set up: •Market outcome •Efficient outcome •Pigouvian taxes Solve: •Competitive equilibrium prices and output •Efficient output •Efficient taxes Illustrate: •Partial equilibrium deadweight losses Concepts: •Types of externalities •Property rights (Coase Theorem) •Command and Control, Cap and Trade
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Externalities Selfish actors Actions of others do not directly affect their objectives Externalities Def: the side effects of one actor’s choices on other actors – Represented by including others choices in utility: U b ( c b ,c g ) Does not include indirect effects ( e.g. price competition)
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Examples Beneficial (or Positive) Externalities Landscaping your yard Beekeeping and orchards Vaccination New complementary products Detrimental (or Negative) Externalities Pollution Annoying behavior (cell phone conversations, public display of affection, etc.)
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Partial Equilibrium approach Marginal Private Cost (MPC) MC to the actor making the choice Marginal External Cost (MEC)
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8-Externalities - Externalities Econ 382 Brennan Platt,...

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