Unformatted text preview: tion of a good or service to society.
9 Positive Externality’s effect on the Competitive Equilibrium
Supply = Marginal Cost Psb* P* Demand = Marginal Benefit
► ► Qsb* Marginal Social Benefit = Marginal Benefit + Marginal External Benefit
Quantity When there exists an externality, the marginal benefit/demand curve is shifted to reflect the benefit of producing to everyone.
The market is then not producing at the equilibrium anymore as the equilibrium is now Qsb*, Psb*. Producing there maximizes surplus.
Producing at Q*, P* instead of Qsb*, Psb* causes a DWL. Because it does not take into account total social benefit.
10 There exists under production so total surplus is subtracted from. How to solve for an externality:
“Solving” for an externality is how we get the market to produce at equilibrium.
There exists many solutions, we will examine 3 of them.
Private Solution: have the effected parties work out their problems between them selves.
Coase Theorem: if private parties can bargain without cost over the allocation of resources they can solve the problem of externality on their own. ►
► Requirements for the Coase Theorem to work: 1.
2. ► Property rights are defined.
Small number of people negotiating. Examples: Sprinkler and laundry, loud party and sleepi...
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- Spring '14