Chapter9 - Part 2

Chapter9 - Part 2 - The Analysis of Competitive Markets...

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Unformatted text preview: The Analysis of Competitive Markets Chapter 9 Externalities In absence of market failures, the competitive market outcome is efficient, maximizes total surplus. One type of market failure: externality , the uncompensated impact of one person’s actions on the well-being of a bystander. Self-interested buyers and sellers neglect the external costs or benefits of their actions, so the market outcome is not efficient. 1 2 3 4 5 10 20 30 Q (gallons) P $ The market for gasoline Demand curve shows private value , the value to buyers (the prices they are willing to pay). Supply curve shows private cos t , the costs directly incurred by sellers. The market eq’m maximizes consumer + producer surplus. $2.50 25 1 2 3 4 5 10 20 30 Q (gallons) P $ The market for gasoline Analysis of a Negative Externality Supply (private cost) External cos t = value of the negative impact on bystanders = $1 per gallon (value of harm from smog, greenhouse gases) Social cos t = private + external cost external cost 1...
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Chapter9 - Part 2 - The Analysis of Competitive Markets...

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