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Lecture 21

# Lecture 21 - ECONOMICS 100A Professor Dan Acland Lecture 21...

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ECONOMICS 100A Professor Dan Acland 11/04/10 Lecture 21 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy, or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ICLICKER QUIZ ANNOUNCEMENTS I assigned you to do some rather painful readings, but I will attempt to make your pain go away. I will apologize in advance if I wind up giving you more pain. This is a very math-intensive lecture, so, hopefully, a big part of that will be making the math clearer, but I will bring in some math that Nechyba skips over, and hopefully that will be helpful to you. LECTURE Slide : Lecture outline: 1. What is an externality? A. Affecting one another without exchanging money. B. Getting something for nothing. 2. Maximizing social welfare when markets don’t. 3. Negative production externalities: an example with math and graph. 4. Solving the problem with a Pigouvian tax. 5. Solving the problem with vouchers. (Cap and Trade) 6. Pros and cons of taxes and vouchers. Slide : 1. What is an externality? A. Affecting one another without exchanging money. - An externality is when either production or consumption of a good causes a positive or negative impact on someone other than the consumer or producer (and this effect is not captured in the market). For example, in the case of production, there is a cost or benefit from production that is not borne by the consumer or producer. On the consumption side, there is a cost or benefit that is not enjoyed by the consumer or producer. - Four possibilities and their canonical examples: o Negative production externality E.G. Air Pollution o Positive production externality E.G. Technological Innovation o Positive consumption externality E.G. Education o Negative consumption externality E.G. Traffic Congestion A negative externality is that the actual act of producing something causes somebody other than the producer or consumer harm . The examples I’ve given are air pollution and traffic congestion, but there are many other examples, like noise pollution. There are also positive externalities, particularly some called network externalities, but also technological innovation. If my firm comes up with some technology that is beneficial to me, unless the government gives me some kind of protecti on, it’s going to leak out, and there will be firms that enjoy the benefit of my production process without paying any costs. Similarly, on the consumption side, we see positive and negative externalities.

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