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Econ 1B03 Chapter 10 Part 2.docx

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Hannah Holmes

Richard Damra Wednesday, February 6, 2013 Econ 1B03 – Chapter 10 Positive Externalities  Now, consider the discovery of penicillin as treatment for STDs.  The drug not only helps those with an STD but also benefits all society by limiting their exposure to disease.  The discovery and production of penicillin has a positive externality.  The social value: includes not only the private value to those who take the drug but it also includes the value to the rest of society  Market for Penicillin: o  We should be buying a selling Q optimum not Q market.  The socially desirable level of out is greater than the market equilibrium level of output  In other words, we are not producing enough of the good.  If we produced more, there would be greater benefits for society.  The government can internalize the externality by subsidizing the production of the good – get firms to supply more.  Government action is not always necessary.  The private sector can sometimes solve the problems of externalities.  Examples include: o Moral codes and social sanctions. Most people don’t litter, due to morality (knows it’s wrong). Boycott polluting producers. o Charities encourage positive externalities. Greenpeace to protect the environment. Alumni gifts to schools because education has a positive externality o Contracts between parties. Two firms can make a deal Richard Damra Wednesday, February 6, 2013 The Coase Theorem  This is a proposition that if private parties can bargain without cost over the allocation of resources, they can solve the externalities problem on their own.  However, property rights have to be well defined for bargaining
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