Intro to Microeconomics_Agnello_Date_041510

Intro to Microeconomics_Agnello_Date_041510 - Figure 2:...

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Figure 2: Pollution and the Social Optimum Red: social cost (includes the cost of cleaning, harm to society) Blue: only supply cost (external cost) Operating along blue supply and demand curve gives the optimum and it is not correct - Positive externality - e.g. Education - Improves society - Lowers crime - Basic research (inventions) - Spreads technology to everyone - Property upkeep - Bystanders benefit - Forces on demand (Figure 3) - Here private demands understates social value - too low - Free market will underproduce - Equilibrium Q too low - inefficient Figure 3: Education and Social Optimum Private demand curve (blue) doesn’t include external positive spillovers, add vertical (red demand curve) Beneficial trades involving more Q are gone when observing just the blue curves; too low Q and too low P - Government may be needed to correct free markets when externalities persist - Internalize the externality - Get the private decision makers to correct their ways - Change incentives to change their ways - For negative externalities - Government needs to discourage activity - Tax market - Regulate market
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This note was uploaded on 08/30/2010 for the course ECON 151 taught by Professor Harris during the Spring '07 term at University of Delaware.

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Intro to Microeconomics_Agnello_Date_041510 - Figure 2:...

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