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Externalities

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Externalities-an undesirable property of Perfect Competition- Market Failures ???? An Externality is . a good or a bad not priced in the market. – PowerPoint PPT presentation

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Title: Externalities


1
Externalities
  • -an undesirable property of Perfect Competition
  • -Market Failures ????

2
An Externality is .
  • a good or a bad not priced in the market.
  • when a good has no price or the wrong price.
  • assumed away in the PC model.

3
Negative Externality
  • E.g., pollution
  • Firm doesnt bear the full costs of production.
  • Firm produces more than is socially optimal.

4
Positive Externality
  • E.g., a garden view, a scientific discovery, a
    public good
  • Beneficial, but uncompensated action.
  • Too little produced than is socially optimal.

5
An example of pollution
  • PC says set PMC. BUT
  • Private MC (to the firm) vs. Social MC !!!!!!
  • In the PC model, costs are underestimated, and
  • ? Price is too low!!!!

6
What PC doesnt consider
7
Solutions
  • Regulation to produce Q
  • Internalize the externality
  • Impose a tax on the firm
  • Sell Pollution Permits

8
What would Coase say?
  • With perfect property rights
  • ? Doesnt matter!!!!!!
  • With ill-defined property rights
  • ? assign rights so as to minimize DWL

9
So ..
  • what IS a Market Failure?????
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