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Ch10 - Chapter 10 Externalities In this chapter look for...

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&KDSWHU °± ([WHUQDOLWLHV
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In this chapter± look for the answers to these questions# :KDW LV DQ H[WHUQDOLW\$ :K\ GR H[WHUQDOLWLHV PDNH PDUNHW RXWFRPHV LQHIILFLHQW$ :KDW SXEOLF SROLFLHV DLP WR VROYH WKH SUREOHP RI H[WHUQDOLWLHV$ +RZ FDQ SHRSOH VRPHWLPHV VROYH WKH SUREOHP RI H[WHUQDOLWLHV RQ WKHLU RZQ$ :K\ GR VXFK SULYDWH VROXWLRQV QRW DOZD\V ZRUN$
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EXTERNALITIES Introduction 2QH RI WKH SULQFLSOHV IURP &KDSWHU ° Darkets are usually a good way to organize economy activity± ,Q DEVHQFH RI PDUNHW IDLOXUHV² WKH FRPSHWLWLYH PDUNHW RXWFRPH LV HIILFLHQW² PD[LPL]HV WRWDO VXUSOXV³ 2QH W\SH RI PDUNHW IDLOXUH externality ² WKH XQFRPSHQVDWHG LPSDFW RI RQH SHUVRQ’V DFWLRQV RQ WKH ZHOO´EHLQJ RI D E\VWDQGHU³ ([WHUQDOLWLHV FDQ EH negative RU positive ² GHSHQGLQJ RQ ZKHWKHU LPSDFW RQ E\VWDQGHU LV DGYHUVH RU EHQHILFLDO³
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EXTERNALITIES Introduction 6HOI´LQWHUHVWHG EX\HUV DQG VHOOHUV QHJOHFW WKH H[WHUQDO FRVWV RU EHQHILWV RI WKHLU DFWLRQV² VR WKH PDUNHW RXWFRPH LV QRW HIILFLHQW³ $QRWKHU SULQFLSOH IURP &KDSWHU ° >overnments can sometimes improve market outcomes± ,Q SUHVHQFH RI H[WHUQDOLWLHV² SXEOLF SROLF\ FDQ LPSURYH HIILFLHQF\³
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EXTERNALITIES Examples of Negative Externalities $LU SROOXWLRQ IURP D IDFWRU\ 7KH QHLJKERU’V EDUNLQJ GRJ /DWH´QLJKW VWHUHR EODVWLQJ IURP WKH GRUP URRP QH[W WR \RXUV 1RLVH SROOXWLRQ IURP FRQVWUXFWLRQ SURMHFWV +HDOWK ULVN WR RWKHUV IURP VHFRQG´KDQG VPRNH 7DONLQJ RQ FHOO SKRQH ZKLOH GULYLQJ PDNHV WKH URDGV OHVV VDIH IRU RWKHUV
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EXTERNALITIES ± ° µ · ¸ ± °± µ± ¶± Q ¹JDOORQVº GP » 7KH PDUNHW IRU JDVROLQH Recap of Welfare Economics 'HPDQG FXUYH VKRZV private value ² WKH YDOXH WR EX\HUV ¹WKH SULFHV WKH\ DUH ZLOOLQJ WR SD\º³ 6XSSO\ FXUYH VKRZV private cost ² WKH FRVWV GLUHFWO\ LQFXUUHG E\ VHOOHUV³ 7KH PDUNHW HT’P PD[LPL]HV FRQVXPHU ¼ SURGXFHU VXUSOXV³ »µ³¸± µ¸
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EXTERNALITIES ± ° µ · ¸ ± °± µ± ¶± Q ¹JDOORQVº GP » 7KH PDUNHW IRU JDVROLQH Analysis of a Negative Externality 6XSSO\ ¹SULYDWH FRVWº External cost #" YDOXH RI WKH QHJDWLYH LPSDFW RQ E\VWDQGHUV #" »° SHU JDOORQ ¹YDOXH RI KDUP IURP VPRJ² JUHHQKRXVH JDVHVº Social cost #" SULYDWH ¼ H[WHUQDO FRVW H[WHUQDO FRVW
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EXTERNALITIES ± ° µ · ¸ ± °± µ± ¶± Q ¹JDOORQVº GP » 7KH PDUNHW IRU JDVROLQH Analysis of a Negative Externality ' 6 6RFLDO FRVW 7KH VRFLDOO\ RSWLPDO TXDQWLW\ LV µ± JDOORQV³ $W DQ\ Q "! µ±² YDOXH RI DGGLWLRQDO JDV H[FHHGV VRFLDO FRVW³ $W DQ\ Q # µ±² VRFLDO FRVW RI WKH ODVW JDOORQ LV JUHDWHU WKDQ LWV YDOXH WR VRFLHW\³ µ¸
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EXTERNALITIES ± ° µ · ¸ ± °± µ± ¶± Q ¹JDOORQVº GP » 7KH PDUNHW IRU JDVROLQH Analysis of a Negative Externality ' 6 6RFLDO FRVW 0DUNHW HT’P ¹ Q #" µ¸º LV JUHDWHU WKDQ VRFLDO RSWLPXP ¹ Q #" µ±º³ µ¸ 2QH VROXWLRQ WD[ VHOOHUV »°½JDOORQ² ZRXOG VKLIW S FXUYH XS »°³
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EXTERNALITIES “Internalizing the Externality” Internalizing the externality DOWHULQJ LQFHQWLYHV VR WKDW SHRSOH WDNH DFFRXQW RI WKH H[WHUQDO HIIHFWV RI WKHLU DFWLRQV ,Q RXU H[DPSOH² WKH »°½JDOORQ WD[ RQ VHOOHUV PDNHV
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