DQ20 - ▽ Production marginal private cost< marginal...

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a) Explain and give examples of favourable and unfavourable externalities in the production or consumption of commodities. Externalities - benefits and costs associated with the production or consumption affect third parties external to the market transaction Favourable externalities – External Benefits Production marginal private cost > marginal social cost e.g. √New technologies development √Historic restoration Consumption marginal private benefit < marginal social benefit e.g. √Education √Health provision √Yard beautification Unfavourable externalities -- External Costs
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Unformatted text preview: ▽ Production marginal private cost < marginal social cost e.g. ×Air and water pollution ×Noise ×Crime ▽ Consumption marginal private benefit > marginal social benefit eg. ×Cigarettes smoking ×Drunk driving b) Use a diagram to explain why the existence of externalities means that the market will provide an inefficient outcome? c) In the case of unfavourable production externalities, what might governments do to correct the inefficiency of the market? ) Legislation ) Specific taxes ) Property rights and individual bargaining (Coase Theorem)...
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This note was uploaded on 09/12/2010 for the course ECON 1101 at University of New South Wales.

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DQ20 - ▽ Production marginal private cost< marginal...

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