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Economics 2151B - Lecture 23.docx

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Economics 2150A/B
Kristin Denniston

Economics 2151B Wednesday April 2 Lecture 23 Chapter 17 – Externalities and Public Goods (con’t) Homework 5 • Due Tues Apr. 8 • Chapter 16 and 17 Example - Figure 17.3 (p. 5, 17.2) • Pollution – a negative externality in production o Marginal Social Cost (MSC) = MPC + MEC (externality per unit) • Given: o Demand – p = 24 - Q o Supply – MPC = 2 + Q o MEC curve: MEC are 0 when Q ≤ 2 MEC are -2 + Q when Q > 2 • We will think of our supply curves as MC curves, and demand curves as our marginal benefits (willingness to pay) • The demand curve is the same for the producers and consumers • We don’t experience any marginal costs of production until production goes beyond 2. • We will be using vertical summation instead of horizontal summation. o We are not focusing on quantities, but adding prices (values) together. o Vertical = the value of the good per unit a) Find market equilibrium: • Set MPC = MPB • Warning: Do not set S = D in these problems (chapter 17 only) • 2+Q = 24-Q Q = 11 d • p = 24-11 = 13 • The market equilibrium has a price of $13 and 11 units b) Find the social optimum: • Set MSC = MSB • MPC + MEC = MSB • (2+Q) + (-2+Q) = 24-Q 3Q = 24 d Q* = 8 • p = 24-8 = $16 • The social optimum is to produce less than what we are actually producing in the market. o We have overproduction by 3 units. Without government involvement, the market will produce too many units. o The DWL occurs at 11 units where the actual costs are higher than the actual benefits to society. c) How can the government make the producer produce at the optimal level? • They can make the producer internalize the negative external costs through 2 methods: (*good short answer question) 1. You could have a tradeable permit situation 2. You could use a Piguvian tax (emissions fee)  Tax = amount of MEC at the social optimum  eg. at Q=8, tax = MEC = -2+8 = $6 (the optimal tax)  *If you are finding that finding the tax is difficult, you can draw the graph and get most of the marks p. 8 – Negative Consumption Externality • Occurs when one person’s consumption affects another person’s consumption of a good • Example: Common Resource Goods o Common resources are goods that rival in consumption and are non- excludable o eg. Clean air and the Kyoto Protocol (carbon emissions in China affects our clean ai
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