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LECTURE #9: MICROECONOMICS CHAPTER 10. Market Externalities Solutions to Problems Caused by Externalities . Market Externalities . Uncompensated impact of one person’s actions on the well-being of a bystander Positive Externalities = consumers or producers benefit Education

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lecture 9 microeconomics chapter 10

LECTURE #9: MICROECONOMICSCHAPTER 10

Market Externalities

Solutions to Problems Caused by Externalities

market externalities
Market Externalities
  • Uncompensated impact of one person’s actions on the well-being of a bystander
  • Positive Externalities = consumers or producers benefit
    • Education
    • Research activity
  • Negative Externalities = consumers or producers do not benefit
    • Pollution
    • Loss of Patent Protection
    • Increases in Cost – Less Quantity at every price level
market externalities1
Market Externalities
  • Market Failure
    • Decision maker - fails to account for externalities
    • Government intervention: protect the interests of bystanders
  • Impact on Welfare Economics
    • Increase in cost of goods, decrease in revenue to producers
    • Taxes imposed to repair effects of externalities
      • Reduced consumer and producer surpluses
      • Are reductions in surplus offset by economic value of increased welfare
pollution and the social optimum
Pollution and the Social Optimum

Price of

Aluminum

Equilibrium

External

Cost

Optimum

Social cost (private cost

and external cost)

QOPTIMUM

QMARKET

Supply

(private cost)

0

Quantity of Aluminum

Demand

(private value)

In the presence of a negative externality, such as pollution, the social cost of the good exceeds the private cost. The optimal quantity, QOPTIMUM, is therefore smaller than the equilibrium quantity, QMARKET.

4

education and the social optimum
Education and the Social Optimum

Price of

Aluminum

External

Benefit

Equilibrium

Optimum

Supply

(private cost)

Social value

(private value

and external benefit)

QMARKET

QOPTIMUM

0

Quantity of Aluminum

In the presence of a positive externality, the social value of the good exceeds the private value. The optimal quantity, QOPTIMUM, is therefore larger than the equilibrium quantity, QMARKET.

Demand

(private value)

5

solutions to problems caused by externalities
Solutions To Problems Caused By Externalities
  • Private Market Solutions
    • Moral codes
    • Social sanctions
    • Coase Theorem
      • private parties bargain on costs
      • Private solution to externality [problem]
    • Provide incentives
      • Corrective taxes and subsidies
      • Violation carries a price
      • Conformance obtains a [tax] benefit
solutions to problems caused by externalities1
Solutions To Problems Caused By Externalities
  • Public (Government) Solutions
    • Regulation
      • Making certain behaviors either required or forbidden
      • Cannot eradicate pollution
    • Taxation and Subsidies
    • Tradable [Pollution] Permits
    • Environmental Protection Agency (EPA)
      • Develop and enforce regulations protecting the environment
      • Dictates maximum level of pollution
      • Requires that firms adopt a particular technology to reduce emissions
homework
Homework
  • Questions for Review: 3, 4, 6 (4, 5, 6 - 4th Ed)
  • Problems and Applications: 1, 6, 12