11ext_sg

11ext_sg - Chapter 11 Externalities Chapter 11...

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Chapter 11: Externalities Chapter 11 Externalities CHAPTER SUMMARY An externality rises when one party directly conveys a benefit or cost to others. A network externality arises when a benefit or cost directly conveyed to others depends on the total number of other users. An item is a public good if one person’s increase in consumption does not reduce the quantity available to others. Equivalently, a public good provides nonrival consumption. The benchmark for externalities and public goods is economic efficiency. At that point, all parties maximize their net benefits. Externalities can be resolved through unilateral or joint action, but resolution may be hampered by differences in information and free riding. Similarly, the commercial provision of a public good depends on being able to exclude free riders. Excludability depends on law and technology. Markets with network externalities differ from conventional markets in several ways. Demand is insignificant until a critical mass of users is established. Expectations of potential users help to determine the attainment of critical mass. KEY CONCEPTS externality critical mass rival positive externality tipping congestible negative externality nonrival excludable externality is resolved public good patent free rider private good copyright network externality GENERAL CHAPTER OBJECTIVES 1. Discuss positive and negative externalities, and their economically efficient level. 2. Explain why it is profitable to resolve externalities, and how to do so. 3. Identify network externalities and apply the concept to the Internet and e- commerce. © 2001 I.P.L. Png & C.W.J. Cheng 1
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Chapter 11: Externalities 4. Distinguish the managerial implications of markets with network externalities from conventional markets. 5. Discuss the concept of a public good and its economically efficient level. 6. Examine the role of technology and law in excluding users from a public good. NOTES 1. Externalities - Benchmark . (a) An externality arises when one party directly (rather than through a market) conveys a benefit or cost to others. i. The presence of an externality implies the relevant market does not exist. ii. A positive externality arises when one party directly conveys a benefit to others, e.g., additional business generated by a new store to the existing shops. iii. A negative externality arises when one party directly imposes a cost to others, e.g., business taken away by a new store from the existing shops. (b) In deciding on the levels of investments that give rise to externalities: i. If the source considers only the benefits and costs to itself , and ignores the benefits and costs to others, i.e., ignoring the externalities. (1).
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This note was uploaded on 12/21/2011 for the course ECON 3014 taught by Professor Michaelshaw during the Spring '11 term at HKU.

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11ext_sg - Chapter 11 Externalities Chapter 11...

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