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Externalities

Externalities. -an undesirable property of Perfect Competition -”Market Failures” ????. 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. Negative Externality. E.g., pollution

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Externalities

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  1. Externalities -an undesirable property of Perfect Competition -”Market Failures” ???? LTC Gutermuth - Industrial Organization

  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. LTC Gutermuth - Industrial Organization

  3. Negative Externality • E.g., pollution • Firm doesn’t bear the full costs of production. • Firm produces more than is socially optimal. LTC Gutermuth - Industrial Organization

  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. LTC Gutermuth - Industrial Organization

  5. An example of pollution • PC says “set P=MC”. BUT ……………… • Private MC (to the firm) vs. Social MC !!!!!! • In the PC model, costs are underestimated, and •  Price is too low!!!! LTC Gutermuth - Industrial Organization

  6. What PC doesn’t consider LTC Gutermuth - Industrial Organization

  7. Solutions • Regulation to produce Q* • “Internalize the externality” • Impose a tax on the firm • Sell Pollution Permits LTC Gutermuth - Industrial Organization

  8. What would Coase say? • With perfect property rights •  Doesn’t matter!!!!!! • With ill-defined property rights •  assign rights so as to minimize DWL LTC Gutermuth - Industrial Organization

  9. So ……………….. what IS a “Market Failure”????? LTC Gutermuth - Industrial Organization

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