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Lecture 18 - Announcements Reading for today text Ch 15 pp...

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11/18/2009 1 Reading for today text Ch 15 pp. 424-450 (394-414 5 th edition) Reading for Monday text Ch 10 pp. 268-287 (256-272 5 th edition) Announcements World Bank report “Cost of Pollution in China” Pollution costs in China amount to US$ 100 billion per year, about 5.8% of GDP Pollution in China Air and Water pollution is responsible for 750,000 premature deaths annually in China 16 cities in the world with the worst air pollution are in China Total Cost of Pollution Externality total cost of pollution to society cost of pollution abatement to firm higher if pollution is lower Cost ($) cost of damage to society higher if pollution is higher 6 to Society Pollution Private Total Cost of Pollution Abatement Total Social Damage of Pollution Total Cost of Pollution Cost ($) Externality best for society minimizes costs firm would choose a higher level of pollution where cost of abatement is 0 firm would choose too much pollution 6 to Society Pollution Private Total Cost of Pollution Abatement Total Social Damage of Pollution QP* QP C Externality analyze with marginal cost and marginal benefit marginal benefit of abatement (MBA) society avoids additional damage from extra pollution marginal cost of abatement (MCA) firm’s extra cost of pollution abatement higher if pollution is lower 6 lower if higher pollution is lower Marginal Benefit of Abatement Pollution Marginal Cost of Abatement $/unit MBA higher than MCA inefficient when there is externality in production efficient level of pollution where MCA = MBA Externality firm chooses level of pollution where MCA = 0
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