Section-13-Externalities-slides

Section-13-Externalities-slides - Externalities Todd Sarver...

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Unformatted text preview: Externalities Todd Sarver Northwestern University Econ 310-2 – Fall 2011 Todd Sarver (Northwestern University) Externalities Econ 310-2 – Fall 2011 1 / 31 Externalities In the models we have considered thus far, the level of consumption by one consumer may effect the prices faced by other consumers, but it had no direct impact on the utility of the other consumers. Todd Sarver (Northwestern University) Externalities Econ 310-2 – Fall 2011 2 / 31 Externalities In the models we have considered thus far, the level of consumption by one consumer may effect the prices faced by other consumers, but it had no direct impact on the utility of the other consumers. How would our models change if the consumption of one consumer directly affected the utility of another? Todd Sarver (Northwestern University) Externalities Econ 310-2 – Fall 2011 2 / 31 Externalities In the models we have considered thus far, the level of consumption by one consumer may effect the prices faced by other consumers, but it had no direct impact on the utility of the other consumers. How would our models change if the consumption of one consumer directly affected the utility of another? What if the production decisions of one firm directly affected the costs of another firm or the utility of nearby consumers? Todd Sarver (Northwestern University) Externalities Econ 310-2 – Fall 2011 2 / 31 Externalities In the models we have considered thus far, the level of consumption by one consumer may effect the prices faced by other consumers, but it had no direct impact on the utility of the other consumers. How would our models change if the consumption of one consumer directly affected the utility of another? What if the production decisions of one firm directly affected the costs of another firm or the utility of nearby consumers? In this lecture we allow for this possibility, which we can model formally using the concept of an externality. Todd Sarver (Northwestern University) Externalities Econ 310-2 – Fall 2011 2 / 31 Externalities In the models we have considered thus far, the level of consumption by one consumer may effect the prices faced by other consumers, but it had no direct impact on the utility of the other consumers. How would our models change if the consumption of one consumer directly affected the utility of another? What if the production decisions of one firm directly affected the costs of another firm or the utility of nearby consumers? In this lecture we allow for this possibility, which we can model formally using the concept of an externality. Definition When an action by an agent affects someone with whom the agent has not engaged in a related market transaction, that effect is called an externality ....
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This note was uploaded on 01/03/2012 for the course ECON 310-2 taught by Professor Sarver during the Spring '08 term at Northwestern.

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Section-13-Externalities-slides - Externalities Todd Sarver...

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