Externalities
Download
1 / 9

Externalities - PowerPoint PPT Presentation


  • 125 Views
  • Uploaded on

Externalities. -an undesirable property of Perfect Competition -”Market Failures” ????. An Externality is …. a “good” or a “bad” not priced in the market. when a good has no price or the wrong price. assumed away in the PC model. Negative Externality. E.g., pollution

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' Externalities' - clare


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Externalities

Externalities

-an undesirable property of Perfect Competition

-”Market Failures” ????

LTC Gutermuth - Industrial Organization


An externality is
An Externality is ….

  • a “good” or a “bad” not priced in the market.

  • when a good has no price or the wrong price.

  • assumed away in the PC model.

LTC Gutermuth - Industrial Organization


Negative externality
Negative Externality

  • E.g., pollution

  • Firm doesn’t bear the full costs of production.

  • Firm produces more than is socially optimal.

LTC Gutermuth - Industrial Organization


Positive externality
Positive Externality

  • E.g., a garden view, a scientific discovery, a “public good”

  • Beneficial, but uncompensated action.

  • Too little produced than is socially optimal.

LTC Gutermuth - Industrial Organization


An example of pollution
An example of pollution

  • PC says “set P=MC”. BUT ………………

  • Private MC (to the firm) vs. Social MC !!!!!!

  • In the PC model, costs are underestimated, and

    •  Price is too low!!!!

LTC Gutermuth - Industrial Organization


What pc doesn t consider
What PC doesn’t consider

LTC Gutermuth - Industrial Organization


Solutions
Solutions

  • Regulation to produce Q*

  • “Internalize the externality”

    • Impose a tax on the firm

  • Sell Pollution Permits

LTC Gutermuth - Industrial Organization


What would coase say
What would Coase say?

  • With perfect property rights

    •  Doesn’t matter!!!!!!

  • With ill-defined property rights

    •  assign rights so as to minimize DWL

LTC Gutermuth - Industrial Organization


So ………………..

what IS a “Market Failure”?????

LTC Gutermuth - Industrial Organization


ad