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Unformatted text preview: 1 Ayal Chen-Zion PETER 103 Fri 5-5:50 Soojin Jo PETER 103 Fri 4-4:50 Martha Gimbel PETER 103 Wed 5-5:50 Roy Allen CENTR 222 Wed 3-3:50 Matthew Louie WLH 2204 Mon 10-10:50 Vinayak Alladi PETER 103 Mon 4-4:50 (1) Exams returned in discussion section beginning today. (2) Check course web page on Saturday for information about grading scale http://dss.ucsd.edu/~jhamilto/Econ2.html Chapter 11: Externalities and Property Rights A. External costs B. External benefits A socially efficient allocation calls for setting marginal social benefit = marginal social cost If social MB > social MC, should have more of activity If social MB < social MC, should have less of activity With perfect competition and no externalities, social MC = private MC and social MB = private MB This is why perfect competition with no externalities results in socially efficient allocation (= Adam Smiths invisible hand) Chapter 11: Externalities and Property Rights A. External costs B. External benefits C. Negotiation and the Coase Theorem 1. Negotiation and negative externalities 11-6 LO 11 - 2 Abercrombie the Polluter Scenario 1 Abercrombies company dumps toxic waste in the river Fitch cannot fish the river No one else is harmed Abercrombie could install a filter to remove the harm to Fitch Filter imposes costs on Abercrombie Filter benefits Fitch Parties do not communicate or negotiate 2 11-7 LO 11 - 2 Abercrombie's Filter Options With Filter Without Filter Abercrombie's Gains $100 / day $130 / day Fitch's Gains $100 / day $50 / day Total Gains $200 / day $180 / day Abercrombie does not install the filter Marginal cost of filter to Abercrombie is $30 per day The marginal benefit to Fitch is $50 per day There is a net welfare loss of $20 per day 11-8 LO 11 - 2 Abercrombie the Polluter Scenario 2 Negotiation changes the outcome Suppose Fitch pays Abercrombie $40 per day to use the filter With filter, Abercrombie pays $30 for filter but gets $40 from Fitch, better off by $10 With filter, Fitch pays $40 to Abercrombie but gets $50 more fish, better off by $10 11-9 LO 11 - 2...
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This note was uploaded on 03/02/2012 for the course ECON 2 taught by Professor Kim during the Fall '08 term at UCSD.
- Fall '08