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Chapter 16 Notes.docx

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Department
Economics
Course
Economics 1021A/B
Professor
Jeannie Gillmore
Semester
Summer

Description
Chapter 16 Notes Externalities  an externality is a cost or benefit that arises from production and falls on someone other then the producer OR a cost or benefit that arises from consumption and falls on someone other than the consumer o an externality that imposes a cost is called a negative externality o an externality that provides a benefit is called a positive externality  four overall types of externalities: o negative production o negative consumption o positive production o positive consumption Negative Production Externalities  congestion, pollution, and carbon emission are the sources of the most costly and widespread negative production externalities  congestion o traffic on the 401 slows as trucks and commuters compete for a position on the highway o the costs of congestion are time and fuel costs  pollution and carbon emission o economic activity pollutes air, water, and land, and these individual areas of pollution interact through the ecosystem  water pollution o the dumping of industrial waste and untreated sewage and the runoff from fertilizers pollute oceans, lakes and rivers  alternatives include chemical processing of waste or using land sites for storage of nuclear waste  land pollution o arises from dumping of toxic waste products o recycling is an alternative, but requires an investment Negative Consumption Externalities  examples include: o smoking tobacco in confined spaces o noisy parties o loud dogs Positive Production Externalities  Example: honey farmer placing beehives beside orange grower’s orchard o honey farmer gets bees that have collected pollen and nectar from orange blossoms o orange farmer gets bees to pollinate the blossoms Positive Consumption Externalities  examples include: o flu vaccine  helps both you and others around you who didn’t get it o CN Tower in Toronto o education Negative Externality: Pollution  a private cost of production is a cost that is borne by the producer of a good or service o marginal private cost (MC) is the cost of producing an additional unit of a good or service that is borne by its producer  an external cost is a cost of producing a good or service that is not borne by the producer but borne by other people o marginal external cost is the cost of producing an additional unit of a good or service that falls on people other than the producer o market price is used to put a dollar value on the cost of external costs  marginal social cost is the marginal cost incurred by the entire society o MSC = MC + Marginal External Cost Producing with Pollution  when an industry is unregulated and free to pollute, the amount of pollution it creates depends on the market equilibrium price and the quantity of good produced  equilibrium is inefficient o allocation of resources is efficient when MSC equals MSB o however, we must account for all of the costs (both private and external) o production that occurs above this leads to a deadweight loss Property Rights  property rights help to reduce the inefficiency that arises from external costs o property rights are legally established title to ownership, use, and disposal of factors of production and goods and services that are enforceable in the courts  Example: suppose that a chemical factory own the river and 500 homes alongside it o the rent that people are willing to pay depends on the amount of pollution o people are willing to pay $2500 a month to live alongside a pollution free river, but only $1500 to live with the pollution created by 4000 tonnes of pollution  if factories produce this quantity, they lose $1000 a month for each home  with property rights in place, the MC curve no longer measures all the costs that the factories face in producing a chemical o it exclude the pollution costs that they must now bear o the MSC curve now becomes the factories marginal private cost curve MC, meaning that the factor bears all the costs  therefore, S = MC = MSC Coase Theorem  proposition that if property rights exist, if only a small number of parties are involved, and if transaction costs are low, then private transactions are efficient o no externalities because the transacting parties take all the costs and benefits into account o it doesn’t matter who as the property rights  application o suppose that residents (from the previous example) owned their homes and the river  the factories would have to pay a fee to the homeowners for the right to dump their waste  the quantity of chemical produced and the amount dumped are the same regardless of property rights  if factories own them, they bear the cost of pollution as they receive a lower income from the residents  if residents own them, factories bear the cost of pollution as they have to pay a fee to the owners  Coase theory works only when transaction costs are low o transaction costs are the opportunity costs of conducting a transaction  e/x when you buy a house, you pay for a realtor to help find the best place and a lawyer to run checks that assure you that the seller owns the property and that after you’ve paid for it, the ownership has been properly transferred o in many situations, transaction costs are so high that it would be inefficient to incur hem  in the factory
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