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Chapter 5 (week 7) Economics

by: Caroline Jok

Chapter 5 (week 7) Economics ECON 1011

Marketplace > George Washington University > Economcs > ECON 1011 > Chapter 5 week 7 Economics
Caroline Jok
GPA 3.8
Principles of Economics I
Foster, I

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Chapter 5 externalities, environmental policy and public goods foster 1011 macroeconomics
Principles of Economics I
Foster, I
Class Notes
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This 4 page Class Notes was uploaded by Caroline Jok on Wednesday October 21, 2015. The Class Notes belongs to ECON 1011 at George Washington University taught by Foster, I in Fall 2015. Since its upload, it has received 25 views. For similar materials see Principles of Economics I in Economcs at George Washington University.


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Date Created: 10/21/15
Professor Foster Econ 1011 Hubbard and O Brien Macroeconomics Foundations and Models Chapter 5 Notes Externalities Environmental Policy and Public Goods Externality Benefit Positive Cost negative that affects someone who is not directly involved in the production or consumer of a goodservice Gov interventions in economy typically reduce economic efficiency When there are externalities they may increase economic efficiency 51 Externalities and Economic Efficiech Effect of Externalities O Interfere with economic efficiency of market equilibrium 0 Difference between the private cost of production and the social cost or the private benefit from consumption and the social benefit 0 Private Cost cost borne by producer of goodservice 0 Social Cost total cost of producing gooservice and equal to the private cost plus any external cost 0 Private Benefit benefit received by the consumer of a goodservice 0 Social Benefit total benefit from consuming a goodservice and is equal to the private benefit plus any external benefit 0 Unless there is an externality private benefit social benefit How a Negative Externality in Production Reduces Economic Efficiency 0 Supply curve 1 marginal private cost 0 Supply curve 2 marginal social cost I Additional cost of producing a unit I Economic Efficiency is improved if production is decreased 0 When there is a negative externality in producing a goodservice too much will be produced at market equilibrium How a positive externality in consumption reduces economic efficiency 0 Demand curve 1 marginal private benefit 0 Demand 2 marginal social benefit 0 When there is a positive externality in consuming a goodservice too little of the good service will be produced at market equilibrium Externalities and Market Failure 0 Market Failure market fails to produce the efficient level of output What causes Externalities O Governments need to guarantee property rights in order for a market system to function well 0 Property rights right individualsbusinesses have to the exclusive use of their property I Right to buy or sell I Tangible or physical or intangible O Externalities and market failures result from incomplete property rights or from the difficulty of enforcing property rights in certain situations 52 private solutions to externalities The Coase Theorem Economically Efficient Level of Pollution Reduction 0 As the reductions increase the additional benefits from fewer buildings and trees being damaged and lakes polluted will decline 0 If the marginal benefit of reducing X is greater than the marginal cost further reductions will make society better off 0 If the marginal cost of reducing y is greater than the marginal benefits further reductions will actually make society worse off The basis for private solutions to externalities 0 When more than the optimal level of pollution is occurring the benefits from reducing the pollution to the optimal level are greater than the costs 0 The total cost of reducing emissions from one level to another is the area under the marginal cost curve between the levels Do property rights matter O IN the absence of the utilities being legally liable the victims of the pollution have an incentive to pay the utilities to reduce pollution up to the point Where the marginal benefit of the last ton of reduction is equal to the marginal cost 0 If the utilities are legally liable they have an incentive to pay the victims of pollution to allow them to pollute up to the same point The problem of Transactions Costs 0 Transaction costs costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of a good or service The Coase Theorem 0 Coase Theorem If transaction costs are low private bargaining will result in an efficient solution to the problem of externalities 53 Government Policies to Deal with Externalities When there is a negative extemality a tax can lead to the efficient level of output 0 Tax to the cost of the extemality When there is a positive externality a subsidy can bring about the efficient level of output Should the Government Tax Cigarettes and Soda 0 Generally governments use pigovian taxes to deal With negative externalities in production 0 Sin taxes argued that these products generate negative externalities in consumption and so taxing them increases economic efficiency Pigovian Taxes and subsidies Government taxes and subsidies intended to bring about an efficient level of output When there are externalities Command and control versus market based approaches 0 Command and control approach government imposing a quantitative limit on the amount of pollution that a firm may produce And requiring 54 Four categories of Goods Rivalry one person consuming a unit of good means no one else can consume it Excludability anyone Who does not pay for a good cannot consume it Nonrival one person s consumption does not interfere With another person s consumption Nonexcludable it is impossible to exclude others from consuming the good Whether they have paid for it or not Private good rival and excludable 0 one person consuming a unit of these goods precludes other people from consuming that unit and no one can consume these goods Without buying them Public Good nonrival and no excludable O Often supplied by a government 0 National defense 0 Free riding individuals benefit from a good Without paying for it Quasipublic good excludable but not rival 0 Cable teleVision 0 Anyone Who doesn t pay can t use it but if you pay it doesn t interfere With anyone else Common Resource Rival but no excludable 0 Forest land 0 One person uses a good it s gone but nothing restricts anyone from using it The Demand for a Public Good 0 A consumer s demand curve for a good represents the marginal benefit the consumer receives from the good The optimal quantity of a public good 0 Occurs Where the marginal social benefit curve intersects the supply curve Common Resources 0 Commons all shared 0 The Tragedy of the commons tendency for a common resource to be overused 0 Is there a way out Enforcing property rights 0 Or impose restrictions on access to the common resources taxes quotas tradable permits


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