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slides_1-neil - What is Environmental A. B. C. D....

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11 What is Environmental A. Externalities B. Private Property and Public Property C. Local public goods D. Public goods
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22 “Conventional” Microeconomics Utility maximizing consumers go to the market to buy goods they want They are the demanders Profit maximizing firms produce goods and services and bring them to the market They are the suppliers Equilibrium prices adjust such that aggregate supply equals aggregate demand in each market
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33 “Conventional Micro” Continued In Standard Micro, there is a market for every good we want whether it is cream cheese, light beer or bad coffee. Property rights are well defined over all goods. This means that access to these goods can be restricted – we say that these goods are excludable This system is efficient – everyone who values a product at more than it costs to produce gets that product However: problems occur when goods are non-excludable
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Types of Goods 44 Rivalrous? Excludable? Example Private Goods Rivalrous Excludable Chocolate Public Goods Non- rivalrous Non- excludable sunset Common Resources Rivalrous Non- excludable Crowded par Artificially scarce Non- rivalrous Excludable Digital music
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What is the problem? Public goods: underprovided e.g.? Public bads: overprovided e.g.? Common resources: underprovided and/or over-utilised Tragedy of the commons: tale of woe for common resources Add sheep till MPB=MPC But impose cost on others: externality 55
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Externality I do not bear all the costs or collect or the benefits of my action Positive externality: MPB<MSB => under provision Negative externality: MPC<MSC => over- provision/over-utilisation If we can make someone bear the full costs of their actions, then we say that the externality has been internalised 66
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77 How Does Environmental Economics Build on “Micro”? Externalities and social cost versus private cost Consider a steel factory that seeks to maximize its own profits by selling Q units of steel The market price of steel = P The cost of hiring labor and capital to produce Q units of steel = 10 + 2*Q2
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88 Profit Maximization Profit = revenue – cost Profit = P*Q - 10 - 2*Q2 Suppose that P = 36 so that marginal revenue = 36, in this case: Profit = 36*Q - 10 - 2*Q2 The profit maximizing output level for the steel firm is to set Q = 9 and profit for the firm = $152
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99 What does society think of this privately optimal choice? In the absence of an externality, the profit maximizing firm produces that amount of steel such that the marginal benefits of production = marginal revenue = 36 just equals the marginal cost to the firm of production Note that given the cost function, the marginal cost = 4*Q and when Q= 9, marginal cost = 36!
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1010 Introducing the Externality! Suppose that an unintended consequence of
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slides_1-neil - What is Environmental A. B. C. D....

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