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3Lecture - that a negative(positive externality imposes on...

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Lecture 3 Externalities I 15:20 What is an Externality? A direct effect of the actions ofone economic agent on the welfare of one or more toher  agents that is not transmitted by market prices Air pollution by factories, air pollution by motorist Not loss in welfare to consumers of corm products due to biofuels Production vs consumption externalities Why do externalities arise? Marginal Benefit: Benefit to society of procuction of one additional unit of a commodity  (demand curve) Marginal Private Cost: Cost of production of one unit of a commodity that is borne by  producer, incl. costs of inputs (supply curve) Marginal externality cost: Economic harm (benefit) from production of one unit of a good 
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Unformatted text preview: that a negative (positive) externality imposes on others ie damage from pollution resulting from production of one unit of good Marginal Social cost: MPC + MEC Responeses to Externalities Assignment of property rights and bargaining Mergers Taxes and subsidies Quotas Standards Market formation: cap and trade Voluntary agreements Education (changing preferences) Though any of these policies can achieve socially optimal privisions they have a significant consequences for distrivution of economic benefits Principles of targeting: poicy should target the externality-producing activity- production or consumption 15:20 15:20...
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