101 lecture 10

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101 lecture 10

  1. 1. Exam 4 Chapters 10, 11, 12 ! Thursday Nov. 14th
  2. 2. Microeconomics Lecture 10 ! Externalities
  3. 3. Key Terms
  4. 4. Key Terms externality internalizing the externality corrective tax Coase theorem transaction costs
  5. 5. Externality
  6. 6. Externality Benefits or Costs to someone else - Third Party! Positive or Negative
  7. 7. Negative Externality Social Personal Public Private Everybody Me Else Benefits Costs Personalize the benefit Socialize the cost
  8. 8. Negative Externality Social Personal Public Private Everybody Me Else Benefits Costs Personalize the benefit Socialize the cost
  9. 9. Negative Externality Social Personal Public Private Everybody Me Else Benefits Costs Personalize the benefit Socialize the cost
  10. 10. Negative Externality Social Personal Public Private Everybody Me Else Benefits Costs Personalize the benefit Socialize the cost
  11. 11. Positive Externality Social Personal Public Private Everybody Me Else Benefits Costs Socialize the benefit Personalize the cost
  12. 12. Positive Externality Social Personal Public Private Everybody Me Else Benefits Costs Socialize the benefit Personalize the cost
  13. 13. Positive Externality Social Personal Public Private Everybody Me Else Benefits Costs Socialize the benefit Personalize the cost
  14. 14. Positive Externality Social Personal Public Private Everybody Me Else Benefits Costs Socialize the benefit Personalize the cost
  15. 15. Rule
  16. 16. Rule Align benefits and costs
  17. 17. Market Failure
  18. 18. Market Failure Markets don’t always produce the most desirable economic outcomes
  19. 19. Negative Externality
  20. 20. Negative Externality Pollution Second-Hand Smoke Litter Congestion Boom Cars
  21. 21. Positive Externality
  22. 22. Positive Externality Trust Ideas Improvements
  23. 23. Negative Externality
  24. 24. Negative Externality Too much of the good is produced because someone else is paying part of the costs
  25. 25. Positive Externality
  26. 26. Positive Externality Too little of the good is produced because producer doesn’t receive all the benefits
  27. 27. Internalize the Externality
  28. 28. Internalize the Externality altering incentives so people consider the effects of their actions
  29. 29. Government Intervention
  30. 30. Government Intervention Subsidize Positives ! Tax and Regulate Negatives
  31. 31. Government Regulation
  32. 32. Government Regulation Command and Control Incentive-Based Optimal level of pollution? Coupons to pollute
  33. 33. $ 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.
  34. 34. Externalities & Market Failures
  35. 35. Externalities & Market Failures Lack of Property Rights
  36. 36. Permits to Drive 100 90 80 70 60 50 40 30 Demand 20 10 0 0 1 2 3 4 5 6 7 8 9 10
  37. 37. Permits to Drive 100 90 80 70 60 50 40 30 Demand 20 10 0 0 1 2 3 4 5 6 7 8 9 10
  38. 38. Permits to Drive 100 90 80 70 60 50 40 30 Demand 20 10 0 0 1 2 3 4 5 6 7 8 9 10
  39. 39. Permits to Drive 100 90 80 70 60 50 40 30 Demand 20 10 0 0 1 2 3 4 5 6 7 8 9 10
  40. 40. Permits to Drive 100 90 80 70 60 50 40 30 Demand 20 10 0 0 1 2 3 4 5 6 7 8 9 10
  41. 41. Permits to Drive 100 90 80 70 60 50 40 30 Demand 20 10 0 0 1 2 3 4 5 6 7 8 9 10
  42. 42. Permits to Drive 100 Set the quantity 90 ! 80 Demand curve will set the price 70 60 50 40 30 Demand 20 10 0 0 1 2 3 4 5 6 7 8 9 10
  43. 43. Tax Driving 100 90 80 70 60 50 40 30 20 10 0 Demand 0 1 2 3 4 5 6 7 8 9 10
  44. 44. Tax Driving 100 90 80 70 60 50 40 30 20 10 0 Demand 0 1 2 3 4 5 6 7 8 9 10
  45. 45. Tax Driving 100 90 80 70 60 50 40 30 20 10 0 Demand 0 1 2 3 4 5 6 7 8 9 10
  46. 46. Tax Driving 100 90 80 70 60 50 40 30 20 10 0 Demand 0 1 2 3 4 5 6 7 8 9 10
  47. 47. Property Rights reduce contention
  48. 48. Transaction Costs
  49. 49. Transaction Costs Costs in time and resources to negotiate and enforce an agreement
  50. 50. Coase Theorem
  51. 51. Coase Theorem Solve contention with property rights if transaction costs are low

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