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AP Economics

AP Economics. Mr. Bernstein Module 74: Introduction to Externalities January 15, 2014. AP Economics Mr. Bernstein. The Economics of Pollution Environmentalists argue unregulated electricity producers overpollute because they do not consider harmful effects

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AP Economics

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  1. AP Economics Mr. Bernstein Module 74: Introduction to Externalities January 15, 2014

  2. AP EconomicsMr. Bernstein The Economics of Pollution • Environmentalists argue unregulated electricity producers overpollute because they do not consider harmful effects • Producers argue regulation interferes with ability to produce at lowest cost • Economists view as topic for cost-benefit analysis where the socially optimal level is where Marginal Social Costs (MSC) intersect with Marginal Social Benefits (MSB)

  3. AP EconomicsMr. Bernstein The Economics of Pollution • MSC curve is upward sloping • MSB curve is downward sloping (~ cleanup cost savings?) • Will society reach OOPT? • NO! (Note optimal pollution is not 0)

  4. AP EconomicsMr. Bernstein The External Costs of Pollution • Negative Externality is an uncompensated cost that a firm or individual imposes on others • Pollution from an Ohio River electricity plant lands on Jersey residents who do not benefit from the electricity • The unregulated market does not care about the pollution costs and produces until MSB = 0

  5. AP EconomicsMr. Bernstein MSC $1000 The External Costs of Pollution • Society would gain the entire shaded triangle if pollution is reduced from Qmkt (MSB=0) to Qopt MSC=MSB MSC and MSB of pollution MSB Qmkt Qopt Qty of Pollution Emitted (tons)

  6. AP EconomicsMr. Bernstein Private Solutions to Externalities • Coase Theorem • Ronald Coase (1960) • Requires clearly defined property rights plus minimal transactions costs • A private solution can be worked out (ie $$ settlement) • Hurdles include communication problems, high legal costs, delaying tactics

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