Lecture 12

Lecture 12 - 10/21/10 Chapter 11: Externalities and...

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10/21/10 1 Lecture 12 Externalities Chapter 11: Externalities and Property Rights A. External costs Definitions • The private costs of an activity are the costs that you personally pay for • The external costs of an activity are negative consequences of that activity for others that you don’t personally pay for • By negative consequence we refer to something they would be willing to pay to prevent if they could Example: driving your car Private costs: • gasoline • wear on car External costs: • traffic congestion • pollution But why is air pollution an “external” cost? What if I care about pollution myself?
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10/21/10 2 • Driving 1 more mile adds 0.1 grams of hydrocarbons to the air • 0.1 grams has a miniscule effect on the air of San Diego • My willingness to pay to have 0.1 fewer grams HC in the air is maybe one-millionth of a cent • So my personal “pollution cost” is one- millionth of a cent • But, if there are 3 million people in San Diego, the external “pollution cost” of driving my car one more mile would be 3 cents Conclusion: even if you care about pollution, the cost you impose on yourself from causing more pollution is tiny compared to the cost you impose on everybody else put
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This note was uploaded on 11/07/2010 for the course ECON ECON 2 taught by Professor Hamilton during the Fall '09 term at UCSD.

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Lecture 12 - 10/21/10 Chapter 11: Externalities and...

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