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econ2 - Externality-An uncompensated action of a producer...

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Externality -An uncompensated action of a producer/ consumer that affects a third party. Occurs when… - Consumption : Private Benefit (A) DOES NOT = Social Benefit (B) a. If A>B Negative Consumption Externality b. If B>A Positive Consumption Externality -Production: Private Cost (C) DOES NOT = Social Cost (D) a. If C>D: Positive Production Externality b. If D>C: Negative Production Externality ** EXAMPLE: POLLUTION** Supply = Marginal Private Cost Social Cost (If no external cost) Demand= Marginal Private Benefit “Net” (if externality MPB DOESNOT = MSB) Market Assures MPC = MPB - Social Optimum: MSC= MSB Consumption Externality Education - increase economic growth -functioning democracy -improve public safety -more charitable giving -Better in nutritional/health care -less criminal activity Supply :CRTS MSB Down Mkt Equil Social Equil Lost Surplus Subsidy (lowers cost p’ p’’
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Other Roles of Government -Public Goods -non-exclusion in consumption -Non-rivalry in consumption -Ex: Military -Social Insurance
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