Chapter Ten

Chapter Ten - PRINCIPLES of MICROECONOMICS by N. Gregory...

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PRINCIPLES of MICROECONOMICS by N. Gregory Mankiw (4 th Edition) Chapter Ten Outline CHAPTER TEN – EXTERNALITIES - Externality – The uncompensated impact of one persons actions on the well-being of a bystander o Negative Externality – If the impact on the bystander is adverse o Positive Externality – If the impact on the bystander is beneficial - Marker equilibrium is not efficient when there are externalities. That is, the equilibrium fails to maximize the total benefit of society as a whole Externalities and Marker Inefficiency Negative Externalities - Social Cost – private cost of the producers plus cost to bystanders who are adversely affected (private cost and external cost) - The social-cost curve is above the supply curve because it takes into account the external costs imposed on society by producers - Qmarket is greater than Qoptimum. The reason for this inefficiency is that the market equilibrium reflects only the private costs of production - How to achieve the optimal outcome? o Tax producers for each unit sold. The tax would shift the supply curve upwards by the size of the tax. - Internalizing the externality – Altering incentives so that people take account of the external effects of their actions Positive Externalities - The social value is greater than the private value, the social-value curve lies above the demand curve. The optimal quantity is found where the social-value curve and the supply
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This note was uploaded on 04/08/2008 for the course ECON 101 taught by Professor Idson during the Spring '08 term at BU.

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Chapter Ten - PRINCIPLES of MICROECONOMICS by N. Gregory...

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