day13 - EXTERNALITIES Externalities can be caused by the...

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EXTERNALITIES Externalities can be caused by the production (supply) of goods (eg., emissions of air pollutants from smokestacks and creation of new knowledge), or from the consumption of goods (eg., second hand smoke from cigarette smokers and yard and home beautification). Externalities can be negative (air pollution and second hand smoke) or positive (new knowledge
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EXTERNALITIES and yard beautification).
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EXTERNALITIES Production Consumption Externalities Externalities negative air & water pollution second hand cigar smoke factory noise noisy parties positive technology spillovers yard beautification historic restoration install ABS system on car
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EXTERNALITIES Q MARKET =Q OPTIMUM When all of the costs of production are borne only by the supplier and all of the value of consumption is reaped only by the consumer, i.e., when
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EXTERNALITIES Q MARKET =Q OPTIMUM there are no eternal benefits or costs to other producers or citizens, then the producer’s private costs is societies’ cost, and consumer’s private benefits are
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EXTERNALITIES Q MARKET =Q OPTIMUM The benefits to society . Therefore, when there are no externalities, private production costs and social production costs are identical; and the private value
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EXTERNALITIES Q MARKET =Q OPTIMUM of consumption is the same as the social value of consumption. Then individuals acting rationally (acting to maximize their personal well- being) interact in competitive markets
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EXTERNALITIES Q MARKET =Q OPTIMUM to decide on an allocation of resources that maximizes the sum of consumer surplus and producer surplus. Then the market equilibrium quantity also
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EXTERNALITIES Q MARKET =Q OPTIMUM maximizes the net social benefit, when there are no externalities. When there are externalities, private costs and values are not the same as
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EXTERNALITIES Q MARKET =Q OPTIMUM social cost and values. For example, when there is a negative production externality, such as smokestack emissions of
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EXTERNALITIES Q MARKET =Q OPTIMUM pollutants, producers’ supply only considers their private production costs, not the additional pollution costs to the rest of society. With the externality, social
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NEGATIVE PRODUCTION EXTERNALITIES Q OPTIMUM Q MARKET cost and private cost diverge. The social cost of production includes the producers’ private costs plus the costs of the pollution borne by the rest of society.
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day13 - EXTERNALITIES Externalities can be caused by the...

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