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Unformatted text preview: gn or magnitude of the 260 externality without revealing the source of the externality or who receives the consequences of the externality. To help clarify, the following table might help... Consumer Producer Consumer (a) (c) Producer (b) (d) The example of the bee keeper and the apple grower falls under category (d) where there are "producer producer" externalities whereas the unborn drug addict example falls under category (a) where there are "consumer consumer" externalities. A typical example of a category (c) externality or "producer consumer" externalities is the case of chemical dumping (i.e. a factory pouring chemical pollutants into a river basin that turns out to be the source of drinking water for local residents...(see Erin Brocovich for details)). Finally, an example of a category (b) externality or "consumer producer" externalities is the case where the popularity of home computer use gives rise to increases in computer literacy in the labour force which in turn increases productivity in many sectors of the economy. SOCIAL VS PRIVATE COSTS Of course, negative externalities impose costs to society and positive externalities accrue some benefit to society. Being economists, we are interested primarily with the costs incurred by negative externalities (economics being the "dismal science"). In the absence of externalities, there are no differences between social and private costs since everything is fully accounted for in our calculations of costs and benefits. Optimal decisions are characterized by the balance between the marginal private costs incurred by individuals and the marginal private benefits accrued to individuals. This condition (optimal cost/benefit analysis) applies to both individuals and society. [Marginal Private Costs] = [Marginal Private Benefits] In the presence of externalities, social costs are, however, different than private costs in the magnitude of the effect of the externality. Individual...
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This note was uploaded on 05/25/2010 for the course ECON 301 taught by Professor Sning during the Spring '10 term at University of Warsaw.
- Spring '10