GWLecture15 - Part IIa Paper 1 General Equilibrium and...

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1 Part IIa: Paper 1 General Equilibrium and Welfare Economics Dr Sönje Reiche
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2 Outline Externalities Books: Cowell: Ch. 9.3.3, 13.4-13.6 Varian: Ch. 34, 36.9-36.10
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3 Externalities Third party effects Inefficiency because the parties involved in the transaction do not take account of the third party Example 1: price of oil rises, switch to fuel efficient car but price of car has gone up because others have also switched Example 2: price of oil rises, switch to public transport, but this is congested by others who have also switched Pecuniary externality : third party affected only through effect on the price Technological externality : third party affected directly (eg directly in utility function, or directly in production function)
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4 Example 2 Traffic Jams Assume there are N commuters with a choice of train or car Travel by train takes 40 minutes The travel time by car increases as the number of car users increases Commuters make the choice which minimizes their personal travel time
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