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