Midterm 2 Chapter 10 - Externalities

Midterm 2 Chapter 10 - Externalities - Chapter 10 Chapter...

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Chapter name Chapter 10 Externalities
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Chapter 10 Study Checklist: Required reading : Chapter 10: whole chapter Online practice quiz questions : Chapter 10: #1-10
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When the Market Works as it “Should”… Recall : Adam Smith’s “invisible hand” of the marketplace leads buyers and sellers to follow rational self-interest in a market to maximize the total benefits that society can derive from a market. market failures can still happen Market failures arise because people ignore (or don’t care about) the external effects of their actions. Causes : Externalities: chapter 10 Public goods: chapter 11 Market power: chapters 15 & 17 33
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4 What is a Property Right? Property right: an owner’s right to use, rent, or sell resources (or property) the owner can also exclude others from using it Property rights are defined and enforced by gov’t, informal social actions, and by ethical norms. Property rights are usually transferable (ex: a car). However, sometimes it can be unclear who has a property right. Do firms have the property right to pollute in the air? …or… Do citizens have the property right to clean air? 44
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Externalities & Market Inefficiency: Externality: A cost (or a benefit) that affects neither the buyer or seller, but instead affects people not involved in the market transaction. An uncompensated impact of one person’s actions on the well-being of a bystander or third party. Our transaction makes someone else
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Externalities & Market Inefficiency: Negative Externality: When the impact on the bystander/ third party is adverse or bad Examples : Automobile exhaust Cigarette smoke Barking dogs or loud pets Loud stereos Living near a hospital
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Positive externality:
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