Lecture11

Lecture11 - Externalities and Property Rights LECTU RE...

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Externalities and Property Rights LECTURE
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Slide 2 External Costs and Benefits Sometimes costs or benefits that result from an activity accrue to people not directly involved in the activity. These are called external costs or external benefits -- externalities for short.
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Slide 3 External Costs and Benefits External Cost (negative externality) A cost of an activity that falls on people other than those who pursue the activity. Automobile exhaust Goods whose production generates toxic smoke Barking dogs (loud pets) Loud stereos in an apartment building.
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Slide 4 In the market equilibrium for such goods, the benefit to buyers of the last good produced is, as before, equal to the cost incurred by sellers to produce that good. But producing that good also results in the costs of the associated pollution. When Market Equilibrium is not Social Optimum
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Slide 5 Then the full marginal cost of the last unit produced - the seller’s private marginal cost plus the marginal pollution cost borne by others - will be higher than the benefit of the last unit produced. When Market Equilibrium is not Social Optimum Social marginal cost = private marginal cost + marginal pollution cost
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Slide 6 MC = S D P Costs and benefits Quantity Q 1 External Costs in Production
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Slide 7 O MC = S D P MSC Costs and benefits Quantity External cost Q 1 Q 2 Social optimum External Costs in Production Too much production
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Slide 8 When costs fall on people other than sellers: market equilibrium quantity > socially optimal quantity. Total economic surplus would be higher if output of the good were lower. Yet neither sellers nor buyers have any incentive to alter their behavior. When Market Equilibrium is not Social Optimum Potentially, some public policy can be implemented to discourage the production of this kind of goods.
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Slide 9 S MB=D P Costs and benefits Quantity Q 1 External Costs in Consumption
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Slide 10 S MB=D P Costs and benefits Quantity Q 1 External Costs in Consumption MSB External cost Q 2 Social optimum Too much production
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Slide 11 External Costs and Benefits External Benefit (positive externality) A benefit of an activity received by people other than those who pursue the activity. Immunizations Restored historic buildings Research into new technologies
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Slide 12 Here, the full marginal benefit of the last unit produced - the price paid by the marginal buyer plus the benefit received by non-buyers - will be higher than the marginal cost of the last unit produced. When Market Equilibrium is not Social Optimum Social marginal benefit = private marginal benefit + marginal benefit received by non-buyers
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Slide 13 S MB=D P Costs and benefits Quantity Q 1 External Benefits in Consumption
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Slide 14 S MB=D P Costs and benefits Quantity Q 1 External Benefits in Consumption External benefit Q 2 Social optimum MSB Too little production
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Slide 15 Market equilibrium results in too little too little production of goods that generate external benefits.
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This note was uploaded on 04/21/2011 for the course ECON 1001 taught by Professor S.c during the Fall '10 term at HKU.

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Lecture11 - Externalities and Property Rights LECTU RE...

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