Externalities. Externality. When the activity of one agent unintentionally imposes costs on, or brings benefits to, another agent. A Negative Externality: Pollution. production to production to individual welfare consumption to production to individual welfare. Positive Externalities.
When the activity of one agent unintentionally imposes costs on, or brings benefits to, another agent.
MSC = MC + MEC
To add them up, costs must be expressed in same units.
Expressing MEC in $ assumes that external costs have equivalent $ value.
But we do it all the time!
Organic food: too costly for most families
Safety features in cars: value of life?
No. of supervisors in kindergarten
Choice of location within city.
Doctors decide whether to prolong life or not.
Costs of medicines
Building a school instead of a hospital.
Legally established titles to the ownership, use, and disposal of factors of production and goods and services that are enforceable in the courts.
Efficient outcome to some)
If transaction costs are negligible, resource allocations will be efficient, regardless of who owns the property rights. The initial allocation of PR will, however, affect wealth distribution.
Sometimes, gvt must intervene to achieve efficiency.
Fundamentals of theory of firms:
contracts vs acquisition
Regulator needs a lot of info.
Taxes are generally more efficient to achieve same pollution objective.
With taxes, less info is required to achieve same pollution objective at lower cost.
MSB = MB + MEB
Free market outcome is inefficient.
People often copy ideas of other without paying for it.
What can the gvt do?
Institutions are crucial to understand difference between rich and poor countries.