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ECON 110: Chapter 10 and 11 Notes

by: Connor Workman

ECON 110: Chapter 10 and 11 Notes ECON 110

Marketplace > Brigham Young University > Economcs > ECON 110 > ECON 110 Chapter 10 and 11 Notes
Connor Workman
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Principles of Economics Mankiw, chapter 10 and 11 notes. Reviews material and vocabulary.
Principles of Economics
Professor Arden Pope
Class Notes
econ 110, Economics, textbook notes, mankiw, Pope, arden, byu, brigham young university
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This 4 page Class Notes was uploaded by Connor Workman on Wednesday February 24, 2016. The Class Notes belongs to ECON 110 at Brigham Young University taught by Professor Arden Pope in Winter 2016. Since its upload, it has received 11 views. For similar materials see Principles of Economics in Economcs at Brigham Young University.


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Date Created: 02/24/16
ECON 110  Chapter 10: Externalities o 10-1 Externalities and Market Inefficiency  Externality: When producing a good or service directly effects someone who neither pays nor receives compensation for the effect. Positive externalities are beneficial impacts, while negative externalities are adverse impacts. Education is an example of a positive externality, while pollution is an example of a negative externality.  10-1a Welfare Economics: A Recap  This is just a review of the supply and demand curves, and what exactly each point means including the equilibrium point.  At a given point on the supply curve, it represents the cost of producing one more unit of a good. At any given point on the demand curve, it represents the cost at which customers are willing to purchase one more of that product.  10-1b Negative Externalities  Internalizing the Externality: enacting legislation like taxes to incentivize buyers and sellers to take into account external effects of their actions.  A social cost curve shows the cost of both private and external costs together. It takes into account the externality.  10-1c Positive Externalities  To internalize these externalities, it is best to incentivize positively things that create them. Federal help with student fees is one incentive to gain more education, which leads to positive externalities like lower crime rates.  "To summarize: Negative externalities lead markets to produce a larger quantity than is socially desirable. Positive externalities lead markets to produce a smaller quantity than is socially desirable. To remedy the problem, the government can internalize the externality by taxing goods that have negative externalities and subsidizing goods that have positive externalities."  Technology Spillovers are when companies compete to develop technology to build their businesses, which then benefits the world. o 10-2 Public Policies toward Externalities  Generally command-and-control policies and market- based policies are the only way the government can help with externalities.  10-2a Command-and-Control Policies: Regulation  Command and control policies are basically requiring or forbidding certain behaviors. For example, the government has forbidden the dumping of toxic chemicals into water supplies to prevent pollution, and for the same reason the government requires emission testing on all vehicles.  10-2b Market-Based Policy 1: Corrective Taxes and Subsidies  Corrective Taxes: taxes enacted to deal with negative externalities. Ideally, these taxes would equal the external cost of an activity with negative externalities.  You can also have corrective subsidies which function the same as taxes but for positive externalities.  Generally economists prefer taxing, since it is more efficient.  10-2c Market-Based Policy 2: Tradable Pollution Permits  These are exactly what they say. Factories decide to sell pollution rights to other factories. This acts as a tax on pollution in the long run, but with marketable value. If the government auctions off 500 pollution licenses, then they can be sure no matter how they are distributed that they are worthwhile.  While pollution taxes set the cost of pollution, tradeable pollution permits set the supply of pollution.  10-2d Objections to the Economic Analysis of Pollution  This book just rips apart all of the objections it raises. One is that a price shouldn't be put on pollution, but we should strive to reduce pollution as much as possible. o 10-3 Private Solutions to Externalities  10-3a The Types of Private Solutions  One solution is just moral codes. Why don't you litter? Because it's wrong.  Charities are another solution, like the sierra club (working to reduce pollution) or contributions to colleges from alumni. The government encourages these things through tax deduction.  Entering into contracts to deal with externalities is also a possibility. So is joining business ventures.  10-3b The Coase Theorem  Coase Theorem: A result of an experiment that suggests that the private market is the best at dealing with externalities.  This theorem assumes that the cost of discussing sides is $0, and that property rights are well enforced.  This is the case no matter what happens with property ri  10-3c Why Private Solutions Do Not Always Work  Transaction costs: The costs that parties incur in the process of agreeing to and following through on a bargain.  Sometimes bargaining just breaks down. o 10-4 Conclusion  The invisible hand is powerful but not omnipotent.  Chapter 11: Public Goods and Common Resources o Chapter Introduction  Now we’re dealing with goods that have no price. o 11-1 The Different Kinds of Goods  Excludable: A good that people can be prevented from using.  Rivalry in Consumption: A good that one person’s use of reduces another person’s ability to use it.  Private Goods: Goods that are both excludable and rival in consumption.  Public Goods: Goods that are neither excludable nor rival in consumption.  Common Resources: Goods that are rival in consumption but not excludable.  Club Goods: Goods that are excludable but not rival in consumption.  This section is specifically to categorize different goods. It is just definitions for days. The last four definitions are just combinations of the first two definitions. o 11-2 Public Goods  Using the example of fireworks as a public good.  11-2a The Free-Rider Problem  Free Rider: A person that receives the benefit of the good but does not pay for it.  People would always choose to be free-riders when the good is a public good, which would lead to market failure to provide an efficient outcome. Therefore, government intervention is one of the only ways to create a public good.  11-2b Some Important Public Goods  National Defense  Basic Research o Not specific research, since specific research can be patented.  Fighting Poverty  11-2c The Difficult Job of Cost–Benefit Analysis  Cost-benefit analysis: a comparison study between the total cost and total benefit of a proposed project.  This analysis is so difficult with public goods because it is hard to gauge benefit and cost from biased perspectives. Private goods are easy, since their value can be determined by market price, but that is not the case with public goods. o 11-3 Common Resources  11-3a The Tragedy of the Commons  The Tragedy of the Commons: A Parable that illustrates how one person’s use of the common resource reduces another person’s ability to use it.  This is illustrated in fishing. Say people are fishing in a lake, and everyone fishes so much that the lake becomes barren and everyone loses their fishing jobs. It is overusing common resources to the point of depletion.  11-3b Some Important Common Resources  Clean air and Water o The market does not protect against pollution.  Congested roads  Fish, Whales, and Other Wildlife o The reason that cows will never go extinct and whales/elephants will, is because cows are a private good and whales/elephants are a common good. o 11-4 Conclusion: The Importance


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