externalities2-ho_002

externalities2-ho_002 - Externalities Chapter 34...

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Unformatted text preview: Externalities Chapter 34 Approximate Grade Cutoffs Average MT1,2 score (out of 50) • A range: 40.5 (top 15%) • B range: 33.5 (50%) • C range: 26.5 (85%) 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? • Regulate market activity • Corrective (Pigouvian) tax/subsidy • Quotas • Create the missing market • Assign property rights (Coase Thm.) • Tradeable permits (Cap n’ trade) Two Firm Example Firm 1: Joe’s coal-burning power plant • Costs: C e ( e , a ) = e 2 + (4- a ) 2 • Produces electricity ( e ) • CO 2 ( a for polluted air ) emissions as a byproduct • ∂ C e ∂ e = 2 e > 0: more costly to produce more power • ∂ C e ∂ a =- 2(4- a ) < 0 (assuming 0 ≤ a ≤ 4): it’s cheaper to make electricity while polluting Two Firm Example Firm 2: Sarah’s polar bear farm • Costs: C l ( l , a ) = l 2 + la + a 2 • Produces polar-bear pelts ( l ) • C 2 emissions cause global warming, making it more difficult to raise polar bears • ∂ C l ∂ l = 2 l + a > 0: it costs more to produce more polar bear pelts • ∂ C l ∂ a = l + 2 a > 0: raising bears is more costly with lost of CO 2 in the air (global warming) What We Saw • There are three goods: electricity, bears, and polluted air • However, there are only two markets: electricity and bears—the polluted air market is missing!...
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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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externalities2-ho_002 - Externalities Chapter 34...

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