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ch11a - Chapter 11 Externalities and Property Rights Monday...

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Chapter 11: Externalities and Property Rights Monday, July 19
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DEFINITIONS external cost (or negative externality) : a cost of an activity that falls on people other than those who pursue the activity external benefit (or positive externality) : a benefit of an activity received by people other than those who pursue the activity
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POLLUTION: A NEGATIVE EXTERNALITY Suppose that the marginal benefit from gasoline consumption is given by the function MB = 200 2Q (where Q is the quantity of gasoline), and the marginal cost to producers of production of gasoline is given by the function MC = 80 + Q . What we have here are the marginal private costs and benefits of gasoline, i.e. the costs that sellers must pay to produce, and the costs that buyers get directly from consuming. However, suppose that every unit of gasoline emits pollution that inflicts an estimated $30 worth of harm to society in general, rather than the buyer or seller in particular. This is called a marginal external cost ( MEC ) Then we have the marginal social cost function MSC = MC + MEC = ( 80 + Q ) + 30 So, MSC = 110 + Q
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NEGATIVE EXTERNALITY: GRAPH marginal private benefit MB = 200 2Q
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