Week%2010%20%20Session%202%202009%20

Week%2010%20%20Session%202%202009%20 - Microeconomics 1...

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Microeconomics 1 Econ 1101 Week 10: Externalities, Common Resources and Property Rights Text: Ch 12 Outline: Market failure – Externalities –and remedies Common Resources Positional Externalities Diane Enahoro Session 2 2009 1
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Reasons for Government intervention in the Market . 1. The establishment of Property Rights 2. The redistributions of income. 3. Correction of Market Failure -when the unregulated market fails to lead to an efficient outcome 4. Promotion of competition 5. Correction of Market Instability Diane Enahoro Session 2 2009 2
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Diane Enahoro Session 2 2009 3 Causes of Market Failure: 1. Externalities- which are the effects of Production or Consumption on another producer or consumer and which are “unpriced” i.e. not taken into account by the market and hence not reflected in either the demand or the supply curves. Externalities can be unfavourable (negative) or favourable (positive). The result of externalities is that - private costs or benefits on which individuals base their market action, are different from the social (true) costs or benefits
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Example: The Beekeeper and the Apple Grower - Positive Externality in Production Diane Enahoro Session 2 2009 4 Price $ Quantity of Hives Demand (MC) S Social Marginal Costs
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Example: The Beekeeper and the Old People’s Home - Negative Externality in Production Diane Enahoro Session 2 2009 5 Price $ Quantity of Hives Demand (MC) S Social Marginal Costs
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Example: Whooping Cough Injections – positive externality in Consumption Diane Enahoro Session 2 2009 6 Price $ Quantity Injections D(MB) (MC) S (Social MB)
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Diane Enahoro Session 2 2009 7 Coase Theorem – Correction of externalities. Cat a leather tanner takes in clean cold water from the river and puts dirty hot water back into the river where Tom is a fisherman in the lake fed by the river. No-one owns the river or the lake. Cat, at a cost to her, can install a filter to clean and cool the water so that Tom’s catch is not affected. Will the filter be installed? Factory Lake
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Diane Enahoro Session 2 2009 8 With Filter Without Filter Gains to Cat ($ per day) 100 130 Gains to Tom ($ per day) 100 50 Costs and Benefits of eliminating polluted waste water Question: If the law does not prevent Cat from dumping dirty
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This note was uploaded on 08/06/2011 for the course FIN 3616 taught by Professor Henry during the Three '11 term at University of New South Wales.

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Week%2010%20%20Session%202%202009%20 - Microeconomics 1...

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