Chapter 17 Chapter 17 Externalities and Public Goods

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4/14/2014Externalities ‐ ExamplesExample Positive/Negative Consumption/ProductionVaccination Positive ConsumptionBandwagon Effect Positive ConsumptionDevelopment of laser PositiveProductiontechnologyManufacturer Polluting a NegativeProductionRiverHighway congestion Negative ConsumptionComputer Network Negative ConsumptionSnob Effect Negative ConsumptionLet’s consider a negative externality…• A perfectly competitive industry where every firmgenerates one ton of pollutant per ton of chemicalthey produce• The pollutant negatively affects society2
4/14/2014Negative Externality 1)OptimalMarginal Social CostIf the marketis left unregulated:Increase Q untilDem=Supply, entailing Q 1at P 12) But the firm is not considering theMEC it causes.3) Adding MPC + MEC = MSC4) Setting MSC=Dem yields Q * at P *= MPC Marginal PrivateCostUnreg. EquilMarginal External CostOptimalUnreg. EquilNegative Externality• At Q 1 , MSC > Demand implying that too muchpollution is being generated.• Intuitively, pollution at Q 1 is so large that social wellfarewould increase if production is reduced, from Q 1 to Q *3
Page 1: 4/14/2014Externalities and Public G
Page 5 and 6: 4/14/2014What do we do with polluti
Page 7 and 8: 4/14/2014Learn by doing 17.2• Inv
Page 9 and 10: 4/14/2014MSC• b) Social OptimumDe
Page 11 and 12: 4/14/2014Learn by doing 17.2 (cont.
Page 13 and 14: 4/14/2014Application:• Congestion
Page 16 and 17: 4/14/20142. What is the socially op
Page 18 and 19: 4/14/2014Criticisms of Coase Theore
Page 20 and 21: 4/14/2014Public Goods, putting the
Page 22 and 23: 4/14/2014• b) What if MC=50?MSB=M
Page 24 and 25: 4/14/2014• Additional Examples ab

Chapter 17 Chapter 17 Externalities and Public Goods

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