14GottExternalShow

14GottExternalShow - Externalities and Public Goods...

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1 Externalities and Public Goods Positive and negative externalities Cost- benefit analysis Market failure Public goods Politics / Special interests
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2 Economic Externalities Costs or benefits imposed on third parties “Third” party”: (who are 1 st and 2 nd parties?) DD and SS curves don’t include externalities.
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3 Economic Externalities Negative externalities Impose costs on “others” Positive externalities Generate benefits on others Free rider Someone who consumes a good or service without paying (positive externality).
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4 Externalities and Market Failure Social cost Includes both the private costs and any external cost Failure of the market to achieve an optimal allocation of resources. (P = MC) Market doesn’t consider externalities.
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EXHIBIT 1 EFFECT OF EXTERNALITIES ON THE MARKET FOR CHICKEN SS: private costs only Change of equilibrium. Market: “Inefficient” P too low Q too high . Why?
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14GottExternalShow - Externalities and Public Goods...

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