10.13.08 - ECONOMICS 1 Professor Kenneth Train 10/13/08...

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ECONOMICS 1 Professor Kenneth Train 10/13/08 Lecture 13 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. LECTURE EXTERNALITIES 1. Externality 2. Negative Externality 3. Positive Externality Greetings! Today we’re going to talk about externalities, one of the most important concepts in Economics. Someone asked about power plants last week, and their pollution and I said let’s wait a week to talk about it. Someone also asked about cigarettes and second-hand smoke. Well, that’s what this concept is about: externalities . Externalities occur when private costs or benefits are not the same as the social costs or benefits. They are “external” to the parties of the transaction. A negative externality is when social costs exceed private costs. A good example of this is pollution. Everyone creates pollution when they drive; driving creates emissions, which leads to global warming. We need to figure out how to deal with this kind of externality. Remember the first lecture when I talked about baby diapers and their disposal? Just the process of living creates negative externalities. What’s another example? Student : Power plants? Power plants are an example, yeah, because they produce pollution. You can find externalities everywhere. Noise pollution is also a big issue, like with motorcycles. It’d be nice to have quiet on the street. Then there are positive externalities , where the social benefits exceed private benefits. What’s an example of this? Student : Education. Actually yeah. You get the benefits of education, and then you have the ability to vote and interact with society and such. This season is also flu season, isn’t it? If you get a flu shot it actually helps everyone because you are less likely to pass the flu on to others. Someone last year also brought up deodorant as an example. How do we take externalities into account? Let’s look at the example of pollution created from the production of fertilizer. I’m using fertilizer so that it’s clear that we’re creating a product that’s good. Fertilizer helps grow crops and feed people. First, some definitions: - MC (prod) = marginal production costs, ignoring pollution. -
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10.13.08 - ECONOMICS 1 Professor Kenneth Train 10/13/08...

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