Macro_Notes_Test2

Macro_Notes_Test2 - Shayra Medal(pay your meter ticket...

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Shayra Medal(pay your meter ticket ) Macro Economics Chapter 5 I. Externality: A benefit or cost tat affects someone who is not directly involved in the production of a good or service. A) Effects of Externalities: 1.Private cost: The cost born by the producer of a good or service. 2.Social cost: The total cost of producing a good, including both the private cost and any external cost. 3.Private benefit: The benefit received by the consumer of a good or service. 4.Social benefit: The total benefit from consuming a good or service, including both the private benefit and any external benefit. B) Externalities and Economic Efficiency externalities may result in market failure. Market failure: a situation in which the market fails to produce the efficient level of output. C) What causes externalities? Property rights: the rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it. II. Private Solutions to externalities: The Coase Theorem The Economically Efficient level of pollution reduction (Fig 5.3) **The marginal benefit from pollution reduction should equal the marginal cost. III. The Clean Air Act: How a government policy reduced infant mortality Reducing lead from 1970 to 2005 to almost 250 thousand IV. The Coase Theorem The Basis for Private Solutions to Externalities (Fig 5.4) -The benefits of reducing pollution to the optimal level are greater than the costs. (net benefits are what count) in between marginal cost and benefit.) V. Property right matter? 1. Transaction cost: The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services. 2. Coase theorem: The argument of economist Ronald Coase that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities Government Policies to deal with Externalities: (fig 5.5) When there is a negative externality, a Tax can bring about the efficient level of output. (fig 5.6) When there is a positive externality, a subsidy can bring about the efficient level of output. 1. Pigovian taxes and subsidies: Government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities.
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2. Command and control approach: An approach that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices. Four categories of Goods:
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Macro_Notes_Test2 - Shayra Medal(pay your meter ticket...

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