4 Positive and negative externalities

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12 Terms

1

when do externalities exist

when there is a divergence between private and social costs/benefits

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2

MSB =

MPB + MEB

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3

MSC =

MPC + MEC

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4

if it is a production externality there are 2

cost curves

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5

if it is a consumption externality then there are 2

benefit curves

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6

if MEB is negative

negative consumption externality

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7

if MEB is positive

positive consumption externality

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8

If MEC is negative

positive production externality

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9

if MEC is positive

negative production externality

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10

the triangle of deadweight loss always

points to the socially oprtimum point of production

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11

why are negative/positive externalities likely to result in over/under production?

only private costs are considered in economic descision making (homoeconomicus)

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12

why the absence of property rights leads to externalities in consumption and production

An absence of boundaries allows free-riders uncontrolled access, which can result in the over-exploitation or misuse of the resource (tragedy of commons).

The moral hazard assumes someone else will pay the consequences for a poor choice. For example, some people might litter the street if they think that other people will clear up after them.

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