ECMC37 Lecture Two.docx

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Economics for Management Studies
Michael Krashinsky

ECMC37 Lecture Two Article:  Externalities both ways (apples and bees) o Bees help the apple growers and the apple growers help the bees o Not an externality because a market springs up o Bees don’t travel very far (have to be transported to the fields for pollination)  Law and economics leans towards right-wing politics (conservatives) o Market failure by government intervention? Cigarettes 0 1 2 3 4 5 per hour Benefits to 0 $0.90 $1.60 $2.10 $2.40 $2.50 Smoker Cost to 0 $0.10 $0.50 $1.20 $2.20 $3.50 Non- Smoker Benefit-cost 0 $0.80 $1.10 $0.90 $0.20 -$1.00 *Diminishing marginal utility (benefits) *Increasing marginal cost  Two types of negotiations: o No-smoking rule (non-smoker can enforce the rule)  Markets will spring up to achieve results o Smoker pays non-smoker S=$1.05 to smoke 2 cigarettes/hour  Each person get $0.55  But will not always be 100% even – depends how has better bargaining power  Test of both parties being made better off: o Smoker is better off if $1.60 – S > 0 o Non-smoker is better off if S-$0.50 > 0 Threat matrix Person Threat Value Cooperative Outcome (2 Share of Surplus cigarettes/hour) Smoker
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