Lecture+19+November+11

Lecture+19+November+11 - 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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This note was uploaded on 11/10/2011 for the course ECON 220:102 taught by Professor Rubin during the Fall '11 term at Rutgers.

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Lecture+19+November+11 - Todays Agenda Externalities...

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