October 5 - October 5, 2011 Econ 101 Lecture Negative...

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October 5, 2011 Econ 101 Lecture Negative externality Competitive outcome is not efficient Deadweight loss from negative externality Efficient level of output – marginal social cost is equal to marginal benefit Positive externality In equilibrium Qd=Qs o Market demand reflects marginal private benefits Sometimes too little is produced Competitive outcome is not efficient Alleviating problems o Government provision o Command and control Internalize the externality o Tax goods that have negative externality o Subsidize goods that have positive externality o Define property rights and create a market for the externality Tax Specific tax - tax per unit o Different from sales tax We denote the price demanders pay: Pd Price suppliers get: Ps Before tax P = Pd = Ps After tax Pd= Ps + t Discourage consumption Boost government revenue Reinterpret supply curve to include tax Pd up, p suppliers get goes down Tax ($ per unit) Pd – Ps
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This note was uploaded on 02/14/2012 for the course ECON 101 taught by Professor Gerson during the Fall '08 term at University of Michigan.

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October 5 - October 5, 2011 Econ 101 Lecture Negative...

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