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17 Externalities


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Unformatted text preview: ng neighbors, etc. 11 How to solve for an externality: 2. Pigouvian Tax: A tax enacted on producers that produce a negative externality. Causes firms to pay for the right to pollute Internalizes the social cost and shifts the supply curve of the firm so that it equals the Marginal Social Cost. Problem: hard to enforce. How it works: a tax is put on each ton of emissions due to production of a good. ► The tax is equal to the marginal external cost. So the Marginal Social Cost is equal to the Marginal MSC = MC + tax MSC = MC + MEC Price Cost MC tax MB Quantity 12 How to solve for an externality: 3. Tradable Permits: Government issued permits that allows them to pollute to a certain limit. Firms then buy and sell the permits amongst themselves. The firms for which it is cheap to decr...
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