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EC325 – Public Economics

EC325 – Public Economics. Michaelmas Term - Week #4. Externalities. This happens a lot. What externalities did you generate today? Left the dishes unwashed. Sneezed on the tube. You attended a class on public economics. Why does drinking a sugary soda generate an externality?. Soda.

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EC325 – Public Economics

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  1. EC325 – Public Economics Michaelmas Term - Week #4

  2. Externalities • This happens a lot. What externalities did you generate today? • Left the dishes unwashed. • Sneezed on the tube. • You attended a class on public economics. • Why does drinking a sugary soda generate an externality?

  3. Soda • Assuming that current soda consumption is Pareto inefficient, would banning all soda remove the inefficiency? • What idea from last week can help us talk about allocations and Pareto efficiency? • …so what would the ‘ideal’ policy do?

  4. Sugary drinks Anything else

  5. Sugary drinks Anything else

  6. Sugary drinks Anything else

  7. Sugary drinks Anything else

  8. Vaccinations and coal energy • Why might choices in these markets generate externalities? • Deciding not to vaccinate might benefit you but it raises the risk of epidemic. • Deciding to produce a lot of coal energy generates a benefit (profit) for the firm but increases pollution / decreases the quality of the environment.

  9. Diagrams • For these diagrams to work we need different types of agents with different preferences / objectives.

  10. P MR MC Q

  11. P MR MC Q* Q

  12. P MR or PMB PMC MD Q* Q

  13. P MR or PMB SMC PMC MD Q* Q

  14. P MR or PMB SMC PMC Q** Q* Q

  15. P Deadweight loss MR or PMB SMC PMC Q** Q* Q

  16. P Deadweight loss MR or PMB SMC PMC Q** Q* Q

  17. Why might a Pigouvian tax be difficult to implement? • To get social optimum, we need to know the marginal damage curve. • Sometimes marginal damage is difficult to assess. • Effects of pollution can take decades to materialize. • Some damage is rather non-tangible.

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