Externality - EXTERNALITIES CHAPTER CHECKLIST When you have...

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EXTERNALITIES
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When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Explain why negative externalities lead to inefficient overproduction and how property rights, pollution charges, and taxes can achieve a more efficient outcome. 1 Explain why positive externalities lead to inefficient underproduction and how public provision, subsidies, vouchers, and patents can achieve a more efficient outcome. 2
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An externality is a cost or a benefit that arises from: Production that falls on someone other than the producer Consumption that falls on someone other than the consumer Negative externality A production or consumption activity that creates an external cost. Positive externality A production or consumption activity that creates an external benefit. EXTERNALITIES IN OUR DAILY LIVES
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Four types of externalities Negative production externalities Positive production externalities Negative consumption externalities Positive consumption externalities EXTERNALITIES IN OUR DAILY LIVES
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< Negative Production Externalities Pollution is the major example of this type of externality. Others are noise and congestion. < Positive Production Externalities Example: Orchards provide positive production externalities to honey producers, who in turn provide positive production externalities to orchards. EXTERNALITIES IN OUR DAILY LIVES
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< Negative Consumption Externalities Smoking tobacco in a confined space Noisy parties < Positive Consumption Externalities A flu vaccination Restoration of an historic building EXTERNALITIES IN OUR DAILY LIVES
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9.1 NEGATIVE EXTERNALITIES < Private Costs and Social Costs Marginal private cost The cost of producing an additional unit of a good or service that is borne by the producer of that good or service. Marginal external cost The cost of producing an additional unit of a good or service that falls on people other than the producer.
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Marginal social cost The marginal cost incurred by the entire society—by the producer and by everyone else on whom the cost falls. It is the sum of marginal private cost and marginal
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This note was uploaded on 04/03/2011 for the course ECON 201 taught by Professor Kan during the Spring '11 term at University of Regina.

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Externality - EXTERNALITIES CHAPTER CHECKLIST When you have...

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