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Chapter 10

Chapter 10 - Externalities

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Department
Economics
Course
Economics 10a
Professor
Gregory Mankiw
Semester
Fall

Description
Part IV: The Economics of the Public Sector Chapter 10: Externalities  ­ externality: the uncompensated impact of one person’s actions on the well­being  of a bystander ­ negative externalities have adverse impacts ­ positive externalities are beneficial ­ market equilibrium is not efficient when there are externalities because external  effects are neglected  Externalities and Market Inefficiency ­ social cost of negative externalities  ▯private costs of producers plus costs to  bystanders affected adversely ­ social­cost curve above supply curve ­ maximize welfare of society  ▯point where demand curve crosses social­cost curve ­ equilibrium quantity larger than socially optimal quantity for products with  negative externalities  ­ internalizing the externality: altering incentives so that people take account of  the external effects of their actions ex: taxes ­ positive externalities  ▯social­value curve lies above demand curve ­ optimal quantity where social­value curve and supply curve intersect ­ socially optimal quantity  more than equilibrium quantity  ­ government can correct market failure by internalizing the externality ex:  subsidies ­ ex: patents when technology spillover occurs, subsidies to encourage technology  spillovers ­ negative externalities lead markets to produce a larger quantity than is socially  desirable ­ positive externalities lead markets to produce a smaller quantity than is socially  desirable ­ to remedy the problem, the government can internalize the externality by taxing  goods that have negative externalities and subsidizing goods that have positive 
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