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Chapter 10

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ECON 200

Microeconomics Chapter 10  Externality: the uncompensated impact of one person’s actions on the well-being of a bystander.  Equilibrium fails to maximize the total benefit to society as a whole.  Supply curve = private cost  Demand curve = private value  Negative externalities  Cost to society of producing aluminum is larger than the cost to the aluminum producers.  Social cost is the private cost and the external cost, so it is above the supply curve.  Where the demand curve and the social-cost curve intersect is where is socially optimal.  Do this through taxes which raise the price and sell at socially optimal  Internalizing the externality: altering incentives so that people take account of the external effects of their actions. • Produce larger quantity than socially desirable.  Positive externalities  Same as before but the externality affects the demand curve.  Fix through subsidies (scholarships)  Lead markets to produce a smaller quantity than socially desirable.  Technology spillover- if one firm discovers something then this advance can be used by other firms as well.  The government gives tax breaks to industries that create technology spillovers  Patents- they can use the money they make to make further advances.  Command-and-control p
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