Welcome to Unit 9
Externalities
The music is the symphonic suite, “Sheherazade”
by Nikolai Rimsky-Korsakov (1888)
Please enjoy
Pure competition many, many, suppliers, none of whom are so
large that they can control the price.
Monopoly
a single supplier able to control price
Oligopoly
an industry with very few producers who, if
they collude, can control price.
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Pure competition many, many, suppliers, none of whom are so
large that they can control the price.
Monopoly
a single supplier able to control price
Oligopoly
an industry with very few producers who, if
they collude, can control price.
Monopolistic
competition
an industry with MANY producers who sell a
differentiated product and, in the long run,
there is free entry into and exit from the
industry.
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Things that it may be helpful to remember
when you get to the end of the course
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Things that it may be helpful to remember
when you get to the end of the course
An externality is said to exist when:
individuals impose costs or benefits on
others but have no incentive to take these
costs and benefits into account.
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Things that it may be helpful to remember
when you get to the end of the course
The Coase theorem states that in the
presence of externalities, a market economy
will:
reach an efficient solution if transaction
costs are sufficiently low.
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Things that it may be helpful to remember
when you get to the end of the course
The efficient quantity of pollution emissions
occurs where:
the marginal social benefit of pollution is
equal to the marginal social cost of
pollution.
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Things that it may be helpful to remember
when you get to the end of the course
The idea that even in the presence of
externalities an economy can always reach
an efficient solution as long as transaction
costs of making a deal are low is known as:
the Coase theorem.
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Things that it may be helpful to remember
when you get to the end of the course
Suppose that the marginal benefit received
from pollution is equal to its marginal cost.
In this instance, we can assume that:
society has achieved its socially optimal
level of pollution.
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Things that it may be helpful to remember
when you get to the end of the course
Oscar owns a meat processing plant that emits
unpleasant odors that waft across the city. Because his
production of processed meat provides a negative
externality to the community, the government should:
impose a tax on Oscar's production of processed
meat because the market quantity is greater than the
socially optimal quantity.
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Things that it may be helpful to remember
when you get to the end of the course
The marginal social cost of a unit of
pollution:
is equal to the sum of the highest
willingness to pay among all members of
society to avoid that unit of pollution.
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Things that it may be helpful to remember
when you get to the end of the course
Marginal social benefit of pollution:
is the benefit to society of one more unit of
pollution.
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Things that it may be helpful to remember
when you get to the end of the course
An emissions tax will:
ensure that the marginal benefit of
pollution is equal for all sources of pollution.
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Things that it may be helpful to remember
when you get to the end of the course
Firm A and Firm B both produce a good that
causes pollution, but both firms differ in
their marginal benefit from pollution. In this
case, an emissions standard would:
not be effective since it does not take into
account differences in marginal benefits.
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Things that it may be helpful to remember
when you get to the end of the course
Pigouvian taxes:
are taxes designed to reduce external
costs.
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Things that it may be helpful to remember
when you get to the end of the course
Markets for the right to pollute are:
created by government when it issues
tradable pollution permits.
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Things that it may be helpful to remember
when you get to the end of the course
Both emissions taxes and tradable emissions
permits:
are examples of efficient cost-minimizing
methods of pollution reduction.
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Things that it may be helpful to remember
when you get to the end of the course
Positive externalities are:
difficult to measure since marginal benefits
are hard to observe.
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Things that it may be helpful to remember
when you get to the end of the course
Flu vaccines often provide both private
benefits to individuals and positive external
benefits to other members of society. As a
result, without government intervention
one would find:
too few flu vaccines being produced since
external benefits would not be considered.
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Things that it may be helpful to remember
when you get to the end of the course
Suppose each person in a community had to
pay for his or her own education from
kindergarten through high school. One
would expect that:
less education would be acquired since
society has not considered the positive
external benefits of education.
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Things that it may be helpful to remember
when you get to the end of the course
In order to encourage consumption of a
good that generates positive externalities,
policymakers would:
provide a subsidy per unit of the good
consumed in order to achieve the socially
optimal level.
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Things that it may be helpful to remember
when you get to the end of the course
Policies aimed at supporting industries that
yield positive externalities such as
technological spillover are referred to as:
industrial policies.
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Things that it may be helpful to remember
when you get to the end of the course
A good is subject to a network externality
when:
an increase in the number of other people
using the good increases its value to an
individual.
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Things that it may be helpful to remember
when you get to the end of the course
Network externalities are often:
a reason for natural monopolies.
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This week’s Discussion Topic
Summarize your research paper
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This week’s Assignment
Marginal costs, marginal benefit and
societal benefit of education
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Remember to complete
your final exam
next week
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Microeconomics.
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