externalities 2 - PAM2040 LastTime Whatisanexternality...

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    PAM 2040  What to do about externalities
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Last Time What is an externality? What type of decision will not “work out well” in a free  market? Can you identify externalities graphically? Does the existence of an externality  require   government intervention?
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Today Assumptions of Coase violated What can the government (the benevolent social  planner) do?
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Coerced Internalization What is it the steel plant and fisherman are  fighting over? Who is “responsible” for cleaning up the river? Think about a market for clean water Gov’t can affect prices or quantities in this  market Taxes  Regulation
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The Market for Pollution
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Two Options for Internalization Levy a  Pigouvian tax  on output equal to MD of  pollution Firms will reduce pollution until tax=cost Set a fixed cap on pollution at P* Need to know what shape of MC curve
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What if there were two Plants ?
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