文档介绍：Chapter 18
Externalities and Public Goods
1
Chapter 1
Topics to be Discussed
Externalities
Ways of Correcting Market Failure
Externalities and Property mon Property Resources
2
Chapter 1
Topics to be Discussed
Public Goods
Private Preferences for Public Goods
3
Chapter 1
Externalities
Negative
Action by one party imposes a cost on another party
Positive
Action by one party benefits another party
4
Chapter 1
External Cost
Scenario
Steel plant dumping waste in a river
The entire steel market effluent can be reduced by lowering output (fixed proportions production function)
5
Chapter 1
External Cost
Scenario
Marginal External Cost (MEC) is the cost imposed on fishermen downstream for each level of production.
Marginal Social Cost (MSC) is MC plus MEC.
6
Chapter 1
MC
S = MCI
D
P1
Aggregate
social cost of
negative
externality
P1
q1
Q1
MSC
MSCI
When there are negative
externalities, the marginal
social cost MSC is higher
than the marginal cost.
External Costs
Firm output
Price
Industry output
Price
MEC
MECI
The differences is
the marginal external
cost MEC.
q*
P*
Q*
The petitive
output is Q1 while the efficient
level is Q*.
The profit maximizing firm
produces at q1 while the
efficient output level is q*.
7
Chapter 1
External Cost
Negative Externalities encourage inefficient firms to remain in the industry and create excessive produ