Lecture+19+April+6

Lecture+19+April+6 - Todays Agenda Externalities...

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Today’s Agenda Externalities Environmental Policy
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Competitive markets and allocative efficiency Under certain conditions, competitive markets lead to allocative efficiency. The right mix of goods on the PPC is produced. MB x social = Mc x social Consumers choose x such that MB x private = P x Profit-maximizing competitors lead to P x = MC x private Thus rational behavior by consumers and firms and perfect competition lead to MB x social = MC x social .
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Externalities Externality: the influence of one consumer's or one firm's activities on others’ utility or production functions. Spillover effect may be detrimental beneficial Externalities may involve firms consumers both
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Examples Pollution : A firm with a smoky factory has no incentive (in the absence of regulation) to take account of the costs imposed on others. Public health : The care taken by a swine flu patient benefits not only the patient, but others who might otherwise be infected. Fishing : When a fishing boat depletes the stock of fish, it raises the cost of catching fish for all other boats in that fishery.
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A negative production externality
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A negative production externality $/Q Q MC private MC social
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A negative production externality $/Q Q MC private MC social External cost
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A negative production externality
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A negative production externality
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A negative production externality
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Remedies for externality problems Negotiation and bargaining Taxes Selling pollution rights Direct quantity controls
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Efficiency through negotiation?
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This document was uploaded on 10/27/2011 for the course ECONOMICS 103 at Rutgers.

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Lecture+19+April+6 - Todays Agenda Externalities...

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