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externalities07 - Externalities An example of market...

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Externalities An example of market failure
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Reason for GRCC no vote Regarding the Grand Rapids Community College (GRCC) millage increase and why I voted against it. When I went to college I worked full-time and took a full-time class load. I dealt with tuition hikes, the price of books and juggling my school and work schedules. It took me over five years after graduation to pay off my student loans. College is not a free ride, nor is it a guaranteed right. I do not understand why people think it is everyone but the student's responsibility to pay for college. It is certainly not my responsibility to subsidize another person's higher education. GRCC is a business that provides a service. Like any other business, it must charge what it needs to provide the service. I'm not expected to subsidize a student's car. Why I should I subsidize that student's college?
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One of the Ten Principles of economics is that: markets are usually a good way to organize economic activity We saw in Chapter 7 that in the absence of market failures, the competitive market outcome is efficient (maximizes Total Surplus) Introduction
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One type of market failure are externalities : the uncompensated impact of one person’s actions on the well-being of a bystander Negative externality (“external cost”) : the effect on bystanders is adverse Positive externality (“external benefit”) : the effect on bystanders is beneficial Externalities
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Alternative Definition Positive Externality: A Benefit that goes un-priced. Negative Externality: A Cost that goes un-priced.
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Self-interested individuals respond to incentives. In a market economy, Prices are incentives. When the market is working efficiently, prices reflect the full (“social”) costs and benefits of individuals’ actions. But if some of the costs or benefits of actions are not reflected in price, then the decisions are not optimal from a social standpoint. This happens when property rights are not well defined
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Property right: the right of the owner to use the property as s/he see fit and the right to sell it. Property rights provide incentives to maintain resources and produce goods and services because well-defined property rights means owners reap the benefits (and pay the costs) of their choices. From the introductory lecture:
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A Negative Externality: Pollution Suppose a paper plant was located next to your property. Paper production creates dioxin (cancer-causing) as a by-product. Can the plant dump its toxic waste on your property? Why not?
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What’s happening here? How is this possible? The damage to the environment is a real economic cost, but decision maker doesn’t face it. The private costs diverge (are less than) the social (full) costs. The market over-produces .
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Other Examples Health risks of second-hand smoke Drunk driving Noise pollution from construction Late night stereo blasting in the dorms Neighbor’s barking dog .
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