Lecture 24 - Apr 22 - Externalities and their welfare impact, Correcting for externalities, Property

Lecture 24 - Apr 22 - Externalities and their welfare impact, Correcting for externalities, Property

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1 Economics 100A Lecture #24: Thursday, April 22 1) Externalities and their welfare impact 2) Correcting for externalities 3) Property rights and the Coase Theorem
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2 (1) Externalities Private transactions cause costs or benefits for other consumers or producers who are not party to the transaction Also known as “spillovers” Benefits and costs of an activity are not “internalized” by the transaction What’s the problem? Too much of a bad thing, or too little of a good thing Note the interdependence of one agent’s payoffs on another’s actions … as in case of a game!
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3 Examples of externalities Pollution as a byproduct Carbon emissions, second hand smoke Toxins dumped into the water supply Noise and visual blight Network effects Network benefits: greater connectedness, sharing Passing along contagious disease (measles, AIDS) Congestion on the highway or Internet Informational spillovers Discoveries of physical laws Learning by observing
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4 External transaction Producer Consumer Q $pQ Third Party X ? Y ?
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5 Taxonomy of externalities Consumption v. Production Consumption: utility affected: U(X, Y; S) Ex: congestion on highways, Internet Production: technology affected: F(K, L; S) Ex: learning from rivals Positive v. Negative Positive = activity benefits a third party to a transaction Ex: attractive yard/house, Negative = activity harms a third party to a transaction Ex: air/water/noise pollution, congestion Positive/negative?: new Wal*Mart, perfume
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6 Taxonomy (cont’d) One-Way v. Two-Way one-way: you v. your neighbor’s stereo, steel mill v. fishery
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Lecture 24 - Apr 22 - Externalities and their welfare impact, Correcting for externalities, Property

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