Chap17 - Krugman and Wells Chapter 17 Steven J. Haider...

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Krugman Krugman and Wells and Wells hapter 17 Chapter 17 Steven J. Haider EC201 Spring 2010
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Overview Chapters 3-7, 10-13: develops and use competitive odel model hapter 9: develops optimal decision making a little Chapter 9: develops optimal decision making a little Chapters 14-16: other models Chapter 17: externalities The situation when ones actions affects others Standard example: pollution his situation will lead to a arket failure a situation where This situation will lead to a market failure : a situation where the competitive model breaks down he rest of the course is spent on topics/applications EC201-14-p2 The rest of the course is spent on topics/applications
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Optimal pollution level? WRONG answer: no ollution pollution If we stopped all activities that produced pollution… RIGHT answer: apply marginal analysis MSC vs MSB Just another application f marginal analysis of marginal analysis The real problem: there may not be agreement on SB and SC Certainly true for pollution yp EC201-17-p3
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Pollution arising from the market Social planner: pollution of Q PT pQ OPT Market Firms/individuals react to private incentives Book: firms face no costs of pollution, so Q MKT results More likely, firms face ome osts till too some costs--still too much pollution Better analysis coming ottom line: private Bottom line: private action is likely to result in too much pollution EC201-17-p4
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Externality Externality : the existence of external costs or benefits an action to an action External cost : an uncompensated cost that an individual or firm imposes on others ollution Pollution Congestion on the freeway External benefit : a benefit that an individual or firm confers on others without receiving compensation Good landscaping Vaccination External costs are a negative externalities and external benefits are positive externalities ey result: externalities make competitive markets inefficient Key result: externalities make competitive markets inefficient Why? Competitive markets have everyone responding to individual incentives…implying they ignore externalities EC201-17-p5
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Too much pollution is inefficient Suppose at Q MKT Reducing pollution gives up relatively few benefits and saves lots of costs
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This note was uploaded on 05/18/2010 for the course ECONOMIC Ec 201 taught by Professor Haider during the Spring '10 term at MSU - Iligan Inst of Tech.

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Chap17 - Krugman and Wells Chapter 17 Steven J. Haider...

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