Making their decisions is marginal social cost when

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making their decisions is marginal social cost When social MC > private MC, too much of the activity is undertaken and result is socially inefficient Chapter 11: Externalities and Property Rights A. External costs B. External benefits Definitions • The private benefits of an activity are the benefits that you personally receive • The external benefits of an activity are positive consequences of that activity for others that you don’t personally get compensated for • By positive consequences we refer to something they would be willing to pay to receive if they needed to
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4 Example: beekeeping Private benefits: sell honey External benefits: many commercial crops (such as apples, oranges, alfalfa, almonds …) have higher yields when more bees are around One colony (30,000 bees) might produce 80 pounds of honey, sell wholesale for $1.50/pound = $120/colony One colony could increase yield of apple orchard by up to several hundred dollars Marginal costs and benefits for the beekeeper Total bee colonies maintained Value ($ per colony) private demand (total honey sales) private marginal cost 30 120 social demand 10 external benefit of 10 th colony is $100 external benefit of 30 th colony is $50 If beekeepers were not compensated for pollination services, the private outcome would be inefficient Total bee colonies maintained Value ($ per colony) private demand (total honey sales) private marginal cost 30 120 social demand social cost of 30 th colony = $120 external benefit of 30 th colony = $50
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  • Spring '08
  • Kim
  • Externalities, San Diego, Externality, External Costs, Marginal social benefit

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