Lecture+29 - Announcements HW for ch. 14 and 16 due Today!...

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Announcements HW for ch. 14 and 16 due Today! HW for ch. 17 due Thursday! MT3 is the Wednesday we get back and will cover chs. 11-18 (plus game theory) Practice problems will be posted on Wednesday. No class Friday No office hours today or Tuesday (Weds by appt.) 1 of 38
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Externalities If externalities are market failures, we need to figure out what to do about them. Our goal as economists is to attempt to “internalize” the externality (or, move the MPC curve so that it coincides with the MSC curve) 2 of 35
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3 of 35 Externalities: Solutions INTERNALIZING EXTERNALITIES Five approaches have been taken to solving the problem of externalities: (1) direct government regulation. (1) government-imposed taxes and subsidies, (1) private bargaining and negotiation, (1) legal rules and procedures, (1) sale or auctioning of rights to impose externalities
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4 of 35 Externalities: Solutions (1) Direct Regulation of Externalities Taxes, subsidies, legal rules, and public auction are all methods of indirect regulation designed to induce firms and households to weigh the social costs of their actions against their benefits. Direct regulations simply put legal limits on the amount or type of externality produced. For example, very dangerous gasses are simply not acceptable externalities. Direct regulation of externalities takes place at the federal, state, and local level. Direct regulation is more of a political than economic solution, let’s consider some more economic solutions.
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Solutions (2) Taxes : The government can force the firms to internalize the externality by taxing the product that is causing the externality. Ideally, the tax should be set equal to the Marginal Damage Cost (MDC). This is tricky since it is very hard to measure the MDC accurately. Note that such taxes do not induce new “cleaner” technologies since they are levied on the product, not the pollution. These work better if we have fixed technology. 5 of 35
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Lecture+29 - Announcements HW for ch. 14 and 16 due Today!...

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