Lec 9 The Problem of Externality 9-13-10 and 9-15-10 sv

Lec 9 The Problem - Externalities I The Problem Contrast Market Success with Market Failure Associated with Externalities Recall that perfectly

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Externalities I – The Problem Contrast Market Success with Market Failure Associated with Externalities. Recall that perfectly competitive markets are characterized by: 1. complete property rights (i.e., no public goods), 2. atomistic participants (i.e., no monopolies), 3. complete information (i.e., rules out inefficiencies from inadequate formation) information), 4. no transactions costs (i.e., rules out externalities ). Three Points: 1. The private market level of output (market equilibrium) with an externality will be the same as the private market output without an externality. 2. The socially desirable level of output (the social equilibrium) will differ from the private market (or simply market) output when there is an externality. 3. When an externality exists, the net economic surplus (welfare) of society can be improved by moving from the market equilibrium to the ocial equilibrium social equilibrium.
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Externalities, Market Failure, and Inefficiency xternality definition in two parts: Externality : 1. Occurs when the production or consumption decisions of one agent affect real (i.e., non-monetary) variables in the roduction or well eing (utility) of another in an unintended production or well-being (utility) of another in an unintended way. 2. When no compensation is made by the producer of the xternal effect to the affected party external effect to the affected party.
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Specifics of Externality Definition • “Real” variables, not prices: Price effects are not regarded as an externality. A shift in emand for blue jeans that raises prices of blue jeans hurts demand for blue jeans, that raises prices of blue jeans, hurts people who like to buy blue jeans. Note, however, that nothing has been done to interfere with the ability to produce or consume blue jeans. They are simply more expensive. Price effects called pecuniary externalities. • “Unintended” effects: you intentionally blow cigar smoke in my face, this is not an If you intentionally blow cigar smoke in my face, this is not an externality. You are intending to lower my well-being.
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This note was uploaded on 12/20/2010 for the course AEM 25 at Cornell University (Engineering School).

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Lec 9 The Problem - Externalities I The Problem Contrast Market Success with Market Failure Associated with Externalities Recall that perfectly

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