101 lecture 10
DESCRIPTION
ExternalitiesTRANSCRIPT
Exam 2 Chapters 6 -11
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Tuesday Nov. 11th
Microeconomics Lecture 10
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Externalities
Key Terms
Key Termsexternality internalizing the externality corrective tax Coase theorem transaction costs
Externality
ExternalityBenefits or Costs to someone else
- Third Party- !
Positive or Negative
Personal Private
Me
Social Public
Everybody Else
Benefits
Costs
Personalize the benefit Socialize the cost
Negative Externality
Personal Private
Me
Social Public
Everybody Else
Benefits
Costs
Personalize the benefit Socialize the cost
Negative Externality
Personal Private
Me
Social Public
Everybody Else
Benefits
Costs
Personalize the benefit Socialize the cost
Negative Externality
Personal Private
Me
Social Public
Everybody Else
Benefits
Costs
Personalize the benefit Socialize the cost
Negative Externality
Personal Private
Me
Social Public
Everybody Else
Benefits
Costs
Socialize the benefit Personalize the cost
Positive Externality
Personal Private
Me
Social Public
Everybody Else
Benefits
Costs
Socialize the benefit Personalize the cost
Positive Externality
Personal Private
Me
Social Public
Everybody Else
Benefits
Costs
Socialize the benefit Personalize the cost
Positive Externality
Personal Private
Me
Social Public
Everybody Else
Benefits
Costs
Socialize the benefit Personalize the cost
Positive Externality
Rule
RuleAlign
benefits and costs
Market Failure
Market FailureMarkets don’t always
produce the most desirable economic
outcomes
Negative Externality
Negative Externality
Pollution Second-Hand Smoke
Litter Congestion Boom Cars
Positive Externality
Positive Externality
Trust Ideas
Improvements
Negative Externality
Negative Externality
Too much of the good is produced because
someone else is paying part of the costs
Positive Externality
Positive Externality
Too little of the good is produced because
producer doesn’t receive all the benefits
Internalize the Externality
Internalize the Externality
altering incentives so people consider the effects
of their actions
Government Intervention
Government Intervention
Subsidize Positives !
Tax and Regulate Negatives
Government Regulation
Government Regulation
Command and Control Incentive-Based Optimal level of pollution? Coupons to pollute
$ Cost
0% 50% 100%The cost to make things perfectly pure is infinite.
Therefore there is an optimal amount of cleanliness where marginal benefits equal marginal costs.
Externalities & Market Failures
Externalities & Market Failures
Lack of Property Rights
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Demand
Permits to Drive
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Demand
Permits to Drive
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0 1 2 3 4 5 6 7 8 9 10
Demand
Permits to Drive
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0 1 2 3 4 5 6 7 8 9 10
Demand
Permits to Drive
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100
0 1 2 3 4 5 6 7 8 9 10
Demand
Permits to Drive
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Demand
Permits to Drive
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Demand
Permits to Drive
Set the quantity !
Demand curve will set the price
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Demand
Tax Driving
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0 1 2 3 4 5 6 7 8 9 10
Demand
Tax Driving
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0 1 2 3 4 5 6 7 8 9 10
Demand
Tax Driving
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0 1 2 3 4 5 6 7 8 9 10
Demand
Tax Driving
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0 1 2 3 4 5 6 7 8 9 10
Demand
Tax Driving
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0 1 2 3 4 5 6 7 8 9 10
Demand
Tax Driving
0
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100
0 1 2 3 4 5 6 7 8 9 10
Demand
Tax Driving
Set the price !
Demand curve will set the quantity
Property Rights reduce
contention and create wealth
Transaction Costs
Transaction Costs
Costs in time and resources to negotiate and
enforce an agreement
Coase Theorem
Coase Theorem
Solve contention with property rights if transaction costs
are low