Lecture Notes 10

Lecture Notes 10 - • P = MC – A positive outcome(Adam...

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Unformatted text preview: 28/02/11 • P = MC – A positive outcome (Adam Smith) • Distortions: imperfect competition • Externalities: unintended consequences, actions by an economic actor which have unintended consequences on an external party, from societies perspective • Perfectly competitive industry – horizontal price line, producing at P = MR = MC. o With production, the firm pollutes its environment o Assume: PMC = SMC (private marginal costs = social marginal costs). Costs as viewed by a particular firm are exactly the same as viewed by society o Additional cost to society: cost of the pollution – SMC > PMC – negative externality o What is the distance between SMC and PMC lines: marginal cost of clean-up, o Incremental cost of clean-up, increasing marginal costs to clean up, slope will be steeper o From societies perspective, the socially desirable level is where SMC intersects the P = MR line, the firm is producing too much of a good • Externality: where social marginal cost and private marginal costs are not equal – (negative externality). The industry will end up producing too much as viewed by society • The firm is not worried about the negative externality – it is external to their decision making – the...
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This note was uploaded on 09/08/2011 for the course ECON 101 taught by Professor Gulati during the Spring '11 term at Columbia.

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Lecture Notes 10 - • P = MC – A positive outcome(Adam...

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