2010 slides_externalities - 1 Externalities There is no cod...

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1 Externalities There is no cod in Newfoundland. Is there over&sh- Which is healthier? Farm raised beef and turkey or wild deer and turkey? What is global warming? How is Canada satisfy- ing the Kyoto accord? We are buying ±greenhouse credits" from countries that are not using all their credits. Is this good or bad? Are Facebook and other social network sites new eco- nomics?
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1.1 Externalities Often, when an agent produces good X, it also pro- duces good Y which the agent may not value fully. 2. Jill builds a beautiful house and the neighbors also enjoy looking at it. else to catch. 4. Peer e/ects ± grading on a curve. Are students working too hard?
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Negative externality: Others dont like the good Y. Positive externality: Others like the good Y. There is no market for this other good. The good is not priced. So the agent producing good Y does not take into account its e/ect on others in society. cost. 2. The view of the house to the neighbors is free. if you could be compensated. 4. Professors do not take into account the over ex- ertion of e/ort. Positive externalities include liquidity e/ects (Ebay), network externalities (Linux), English as a common language (Is this a positive externality?).
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1.2 The tragedy of the commons. There are n caught tomorrow. (We ignore longer horizon) We are looking at the Nash Equilibrium of this game. So we need to compute the payo/ if he catches it today and the payo/ if he throws it back. Then best response. Finally, we want to make sure that at the Nash Equilibrium, everyone is playing their best response. s sell for p ps .
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If he throws it back into the sea, the new size to- morrow is g ( s ) His probability of catching it tomorrow is 1 n . So his expected revenue tomorrow is pg ( s ) n . His discounted revenue from throwing it back is pg ( s ) n (1+ r ) where r is the discount rate.
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He will throw it back if pg ( s ) n (1 + r ) > ps g ( s ) n (1 + r ) > s Assume that g ( s ) is increasing at a decreasing rate in s . Then he is indi/erent if
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This note was uploaded on 04/10/2010 for the course ECO ECO200 taught by Professor Carlosserrano during the Spring '10 term at University of Toronto- Toronto.

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2010 slides_externalities - 1 Externalities There is no cod...

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