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Chapter 10.docx

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Department
Economics
Course
ECO105Y1
Professor
Paul Cohen
Semester
Winter

Description
Chapter 10: Acid Rain on Others Parades (Externalities, Carbon Taxes, Free Riders, and Public Goods) Negative or positive externalities make smart private choice different from smart choices -Smart choices require that all additional benefit and additional opportunity costs— including externalities—be counted Negative externalities (external costs)—costs to society from your private choice that affect others, but that you do not pay Positive externalities (external benefits)—benefits to society from your private choice that affect others, but that others do not pay for -Externalities occur when no clear property rights exist -When externalities exist, prices don’t accurately reflect all social cost and benefits, preventing markets from coordinating private smart choices with social smart choices. Market fail: -Producing too much of things we don’t want (second hand smoke, pollution, traffic jams) -Producing to little of things we don’t want (vaccinations, education) 10.2 To coordinate smart private choices that generate negative externalities, with smart social choices, choose the quantity of output where marginal social cost equals marginal social benefit As we reduce pollution, “efficient pollution”, balances additional environmental benefits with additional opportunity costs of reduced living standards Socially desirable amount of pollution is not zero; at some point additional opportunity costs of reduction in pollution are greater than additional benefits For any product/service that generates an externality, rule for a smart choice is: Choose quantity of output where marginal social costs equal marginal social benefit Marginal social cost (MSC) marginal private costs plus marginal external cost Marginal social benefit (MSB) marginal private benefit plus marginal external benefit Markets overproduce products/services with negative externalities; price is too low because it does not incorporate external costs. 10.3 Government policies can force polluting businesses and individuals to pay the marginal external cots of their pollution. As a result, polluters internalize their externalities/costs into their private choices, creating smart social choices -Without property rights to the environment, businesses have incentives to save money and improve profits but ignoring external costs like pollution and global warming -Governments can remedy market failures from extern
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