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section4_brian - 1 Section Notes Week 4 Outline Key...

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1 Section Notes Week 4 Outline Key Concepts Announcements: Errors, OH Non rivalry Review of Externalities Non excludability Public goods Free riding “Excludable” public goods Discrimination Errata I corrected and re-uploaded the section notes from last time, but wanted to alert you to two mistakes on the Coase graph: (1) the vertical axes should be where the MB and MC graphs hit the horizontal axis, and (2) the bottom right cell of the table should be B, not B+C. Review of Externalities Over the last three weeks we explored production externalities and studied: 1. What they mean for welfare and efficiency, and 2. How to internalize them. You need to be able to explain, graph and calculate with numbers these two things, under- standing how they might depend on (A) market structure (i.e. competition vs. monopoly, monopsony, etc.), (B) uncertainty of information, and (C) heterogeneity of producers. The problem set is addressing (A): doing it over and over again for competitive and monopoly outcomes. The basic points: With an externality, competitive markets are not socially efficient. Intervention (i.e. regulation), although likely important under competition, may not be necessary when there’s non-competitive pricing, as in under a monopolist, etc. There are numerous ways to internalize an externality, either through regulation (taxes, subsidies, standards, or tradable permits) or through new markets ` a la Coasian bargain- ing, for which the strategy may be to enable property rights, reduce transaction costs and/or increase information. Last Thursday he went over the issues arising from (B) and (C), which although not likely to surface on the next problem set will definitely be on the exams in one form or another.
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