Week 9 Notes
Week 9 Notes ECON-E 201 Peter Olsen
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This 3 page Class Notes was uploaded by Kaitlyn West on Sunday March 29, 2015. The Class Notes belongs to ECON-E 201 Peter Olsen at Indiana University taught by Peter Olsen in Winter2015. Since its upload, it has received 96 views.
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Date Created: 03/29/15
Lecture 13 Notes Economic wellbeing rises when A Pollution is reduced as long as marginal bene ts gt marginal costs B Crime is reduced as long as marginal bene ts gt marginal costs C Terrorism is reduced as long as marginal bene ts gt marginal costs 1 Do it if bene t gt cost 2 Don t do it if cost gt bene t 3 Stop if bene t cost 4 CostsBene ts are analyzed at the margin ll Externalities A Spillover costs and bene ts B Economic Rational for government intervention in markets is economic rationale C Negative Externality 1 Spillover cost imposed on a third party 2 Ex chemical waste poured into rivers 3 Negative externalities can be created by producers and consumers a Producers waste in rivers factory smoke b Consumers auto exhaust litter dog waste D Positive Externalities 1 Bene t conferred on third party not captured by the market price a Production garbage collection education b Consumption inoculation education deodorant E If externalities exist 1 Market supply and demand do not include all bene tscosts 2 Market quantity is not ef cient F Social Cost private cost externality cost 1 New supply curve above the old supply curve G Social Bene t private bene t externality bene t 1 New demand curve above the old demand curve H Environmentalism is 1 Part science part aesthetics part religion Economic Investigation is 1 Science when positive logical thought and evidence 2 Ef ciency when normative J Social Optimum maximizing wellbeing 1 Social Value Social Cost a Note these costsbene ts are measured at the margin III Negative Externality Analysis 1 Problem Some cost escapes market pricing mechanism a Ex paper mill emits waste into river b Why a cost i Other uses are given up by a third party ii Not included in Private cost or market supply c Market Quantity gt Optimum Quantity too much of that good d Solution i Impose Tax the externality cost ii External cost is internalized iii Optimum quantity results 2 Internalize a Negative Externality a Ef ciency Goal i Prices re ect full opportunity cost and value ii Resource users considers full costs and bene ts iii Produceconsume quantity such that Social Value Social Cost 3 Corrective Pigovian Tax a Deadweight loss from Pigovian Tax None b Does ef cienct quantity of paper imply zero pollution No Optimal pollution is the goal c Optimal pollution varies with among other things income i Environmental quality is a normal good i Not surprising that poor countries are less concerned about pollution 4 Negative externality in consumption a Social vaue lies below market demand curve IV Positive Externality Analysis A Problem some bene ts escape market pricing mechanism 1 Social vaue lies above market demand curve a Ex Inoculation u shots 2 Solution Corrective Subsidy a Payment by government external bene t b Social optimum attained 3 Pigovian taxes and subsidy use market incentives to improve ef ciency B Remedies to Externalities 1 Pigovian taxsubsidy 2 Command and control 3 Coase Theorem 4 Tradeable pollution permits V Command and Control A Government regulates sets standards and mandates B Problems 1 Uniform Standards 2 Not least cost a Clean Air Act 1970 3 Reduced incentives to innovate a Compare auto emissions vs personal computers 4 Polluters choice comply or delay Vl Coase Theorem VII A All externalities involve a disputed use of a resource 1 Use A reduces Use B 2 Use B reduces Use A 3 Resource in dispute is not owned 4 Not bad guys vs Good guys B Coase private solution 1 Cost of externality must be greater than transaction costs a Note Which party assumes ownership is unimportant 2 Ef cient result occurs 3 Useful for quotsmall numberquot externalities Tradeable Pollution Permits A Mechanism 1 OK to pollute with a permit 2 OR Clean Up no permit required B Who Cleans up Who buys permit 1 Firms that can cheaply clean up sell their permits to rms where it would be more expensive to clean up 2 All rms are motivated by whatever incurs the least costs
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