Class 15s

Class 15s - Department of Economics LeBow College of...

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Department of Economics Fall 2009 LeBow College of Business Economics 301 Drexel University Professor Stehr Class 15 Outline 1) Externalities 2) Common property resources 3) Public goods Negative externality—an action by a producer or consumer that harms other parties but is not accounted for in the market price Examples 1) factories generate pollution which harms third parties 2) driving slows others down and generates air pollution 3) 4) 5) Positive externality— an action by a producer or consumer that benefits other parties but is not accounted for in the market price Examples 1) getting a vaccine makes it less likely others will get sick 2) honey production generates positive externalities for fruit growers because bees pollinate blossoms 3) 4) 1
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Negative externality in production MEC or marginal external cost—the additional cost of producing one more unit that is not paid for by the producer MSC or marginal social cost = Negative externality in production in perfectly competitive industry Socially optimal quantity is where P = MSC, or where demand and MSC intersect. A perfectly competitive firm will produce where P=MC Firm and industry produce too much output. Q Equil > Q S.O. With an externality, invisible hand fails; market failure! Perfectly competitive market does not lead to an efficient allocation of resources. 2
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Suppose there are 100 firms in a perfectly competitive industry each with MC = q.
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Class 15s - Department of Economics LeBow College of...

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