ECON 102 Chapter Notes - Chapter 25: Coase Theorem, Marginal Utility, Marginal Cost

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Published on 20 Jan 2017
School
University of Illinois
Department
Economics
Course
ECON 102
Professor
Econ 102
Prelecture 25: Externalities
Negative and Positive Externalities
Externality a situation when in the actions of an individual or firm benefits or harms
another individual or firm without providing any compensation to those creating the
benefit or to those harmed
Negative externality (cost for others) example: firm dumps stuff in stream and fishers are
harmed
Positive externality (benefit for others)
o Example: opening of a new amusement part leads to positive externality for city
because it leads to opening of hotels and shops catering to the amusement part
visitors.
o Example: home owner chooses to landscape her house which increases the
property value of all other houses on the street
Because these benefits and costs are external, the market will not allocate resources
efficiently
Which of the following is an example of an externality:
a) A long line of people at an afternoon matinee at the movie theater.
b) A flood wipes out a farmer's entire corn crop.
c) A student sells his/her economics textbook after failing the class.
d) A student voluntarily asks a question during class.
Asking a question during class tends to affect other students in the class, either positively or negatively (depending
on the quality of the question).
Externalities and Market Failure
Markets on their own often fail to correct of externalities because markets on their own
do not send the right signal to consumers and producers
Marginal social cost is the real cost because it includes the private cost as well as
external costs to other ppl to the supply curve
When marginal social costs are considered, the equilibrium price of cattle increases, and
the equilibrium quantity falls
Positive externalities create a similar but opposite problem
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Document Summary

Externality a situation when in the actions of an individual or firm benefits or harms another individual or firm without providing any compensation to those creating the benefit or to those harmed. Negative externality (cost for others) example: firm dumps stuff in stream and fishers are harmed. Because these benefits and costs are external, the market will not allocate resources efficiently. Asking a question during class tends to affect other students in the class, either positively or negatively (depending on the quality of the question). Markets on their own often fail to correct of externalities because markets on their own do not send the right signal to consumers and producers. Marginal social cost is the real cost because it includes the private cost as well as external costs to other ppl to the supply curve. When marginal social costs are considered, the equilibrium price of cattle increases, and the equilibrium quantity falls. Positive externalities create a similar but opposite problem.

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