ExternalitiesLecture1a

ExternalitiesLecture1a - Externalities 1 Outline Definition...

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1 Externalities 1: Outline Definition Pigovian taxes The Coase Theorem Quantity regulation and tradable pollution permits The “commons” problem
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2 Externalities: Definition An externality exists whenever one economic agent’s behavior affects the utility or profits of some other economic agent, where these effects are not transmitted through market prices
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3 Externalities: Examples Pollution Others? Externalities → incomplete markets (and hence market failure) Externalities may be negative or positive
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4 Pigovian Taxes Externalities were first analyzed by Arthur Pigou in the 1920’s Example: crop damage from railroads
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5 Pigovian Taxes
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6 Pigovian Taxes
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7 Pigovian Taxes
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8 Pigovian Taxes Problem: the railway company was not responsible for the damage to crops Solution: impose tax = marginal damage caused to crops on railway companies
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9 Pigovian Taxes
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10 Pigovian Taxes
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11 Coase (1960) Critique of Pigou: Unidirectional causality Ignores role of tort and property law Ignores bargaining among affected parties
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This note was uploaded on 04/08/2008 for the course ECON 253 taught by Professor Damika during the Spring '08 term at UConn.

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ExternalitiesLecture1a - Externalities 1 Outline Definition...

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