Chapter 10 - Economics 101 1 External Cost and Benefits...

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Economics 101 Chapter 10: Externalities and Property Rights 1. External Cost and Benefits -Externalities -External Cost -A cost that is borne by people other than those who pursue the activity -Called a Negative Externality -External Benefit -A benefit received by people other than those who pursue the activity -Called a Positive Externality -Externalities and the Invisible Hand -The implication or resource allocation of the invisible hand apply under conditions of perfect competition – i.e. Conditions where externalities do not exist -With externalities present, the socially efficient allocation of resources may not occur -Externalities and Resource Allocation -Individuals considering only their own cost and benefits will tend to engage: -Too much in activities that generate Negative Externalities -Market price overestimates the benefits of the activity! -Too little in activities that generate Positive Externalities -Market price underestimates the benefits of the activity! -Coase Theorem -Coase Theorem -If there are no negotiation costs, then people can negotiate the purchase and sale of the right to perform activities that cause externalities -Therefore, if cost-less negotiations are possible between those who pursue an activity and those affected (positively or negatively) then the parties can always find solutions that will overcome the inefficiencies caused by externalities -Note that the conclusion of Coase’s Theorem: -DOES NOT depend upon who has the property right! -The distribution of benefits and costs DOES depend upon who has the property right!
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