externalities-ho

externalities-ho - Externalities (Chapter 34) Quiz 3 In...

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Unformatted text preview: Externalities (Chapter 34) Quiz 3 In section next week Two questions 1 Relates to exchange 2 Relates to externalities Externalities An externality is a cost or a benefit imposed upon a third party by a the production or consumption of a good. Also known as a spillover An externally imposed benefit is a positive externality An externally imposed cost is a negative externality Negative Externalities Examples: Pollution Noise Traffic congestion Increased insurance premiums due to smokers Lack of trust in financial markets after bank failure Production in oligopoly, e.g. cheating on a cartel(???) Positive Externalities Examples: Well-maintained property next door Pleasant bakery smell Improved driving habits Technological/medical advance Good students in a classroom Big Picture Externalities cause market failure They affect people who are not buyers or sellers of the good That is, they occur outside markets The market for the external effect is missing Private cost 6 = social cost; private benefit 6 = social benefit Goods w/ negative externalities are overproduced Goods w/ positive externalities are underproduced Big Picture How can we correct this market failure?...
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This note was uploaded on 12/26/2011 for the course ECON 100B taught by Professor Kilenthong during the Fall '08 term at UCSB.

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externalities-ho - Externalities (Chapter 34) Quiz 3 In...

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