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Unformatted text preview: Chapter 10; Externalities Externalities: Eunice is asleep and the uncompensated impact of one persons actions on the well- being of a bystander Market equilibrium is not efficient when there are externalities The equilibrium fails to maximize the total benefit to society as a whole Externalities and Market Inefficiency Welfare Economics: A Recap The demand curve reflects the value to consumers The height if the demand curve shows the willingness to pay of the marginal buyer Supply curve reflects the cost of producing The height of the supply curve shows the cost of the marginal seller Negative Externalities Because of externalities, the cost to society is larger than the cost to producers The social-cost curve is above the supply curve because it takes into account the external costs imposed on society by producers The difference between these two curves reflect the costs emitted Maximize the total surplus; the value to consumers minus the cost of producing The cost of producing includes the external costs Planner chooses the level of production at which the demand curve crosses the social-cost curve Planner does not produce more than this level because the social cost of producing exceeds the value to consumers One way to achieve optimal outcome is to tax Tax shifts the supply curve upward by the size of the tax Internalizing the externality: altering incentives so that people take account of the external effects of their action Positive Externalities Optimal quantity is found where the social-value curve and the supply curve interest...
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