E251x.F11.W09.Ext.Public Goods

E251x.F11.W09.Ext.Public Goods - ECON 251x Externalities...

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ECON 251x (Chapter 18)
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Externalities Some Transactions affect other people than the Buyers and Sellers externality : Action by either a producer or a consumer which affects other producers or consumers, but is not accounted for in the market price.
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Negative Externality in Consumption $ Price x Qty x /T Dx = MV Sx $Pe Qe MSB $Pe’ Qe Efficiency Loss External Harm Social Optimum
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Negative Externality in Production $ Price x Qty x /T S x = MC $Pe Qe $Pe’ Qe’ MSC D x Efficiency Loss External Harm Social Optimum
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Solutions to Negative Externalities Internalize the Externality Problem : Market overproduces relative to optimum Solution : Reduce output to optimum Tax buyers (reduced demand reduces Qty.) Tax Sellers (reduces supply reduces quantity)
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Positive Externality in Consumption $ Price x Qty x /T MSB Sx $Pe’ Qe’ Dx =MV $Pe Qe Efficiency Loss Social Optimum
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Solutions to Positive Externalities Internalize the externality Problem : Market under-produces relative to optimum Solution : Increase output to optimum Subsidize buyers (Increase demand increase Qty.) Subsidize Sellers (Increase supply increase quantity)
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Private Solutions to Externalities Types of private solutions: moral codes and social sanctions, e.g., the “Golden Rule” charities, e.g., the Sierra Club contracts between market participants and the affected bystanders
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“The Fable of the Bees” Written in 1732 by Bernard Mandeville Millions endeavoring to supply Each other’s Lust and Vanity … ( Fable i. 18). Thus every Part was full of Vice, Yet the whole Mass a Paradise … (i. 24). The bees, however, are not satisfied to have their viciousness (self-interest)mixed with their prosperity and pray the gods for honesty. This raises the indignation of Jove, who unexpectedly grants the hive its wish.
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BUT, Oh ye Gods! What Consternation, How vast and sudden was th’ Alteration! (i. 28). As Pride and Luxury decrease, So by degrees they leave the Seas. … All Arts and Crafts neglected lie; Content, the Bane of Industry, Makes ’em admire their homely Store, And neither seek nor covet more (i. 34–5). In this way, through the loss of their vices, the hive at the same time lost all its greatness.
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Now comes the moral: THEN leave Complaints: Fools only strive To make a Great an Honest Hive.
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E251x.F11.W09.Ext.Public Goods - ECON 251x Externalities...

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