The music is the symphonic suite, “Sheherazade” by Nikolai Rimsky-Korsakov (1888) Please enjoy Externalities Welcome to Unit 9

Slide 2 Pure competition many, many, suppliers, none of whom are so large that they can control the price. Monopoly a single supplier able to control price Oligopolyan industry with very few producers who, if they collude, can control price.

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Slide 14 Pure competition many, many, suppliers, none of whom are so large that they can control the price. Monopoly a single supplier able to control price Oligopolyan industry with very few producers who, if they collude, can control price. Monopolistic competitionan industry with MANY producers who sell a differentiated product and, in the long run, there is free entry into and exit from the industry.

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Things that it may be helpful to remember when you get to the end of the course Slide 46

Things that it may be helpful to remember when you get to the end of the course An externality is said to exist when: individuals impose costs or benefits on others but have no incentive to take these costs and benefits into account. Slide 47

Things that it may be helpful to remember when you get to the end of the course The Coase theorem states that in the presence of externalities, a market economy will: reach an efficient solution if transaction costs are sufficiently low. Slide 48

Things that it may be helpful to remember when you get to the end of the course The efficient quantity of pollution emissions occurs where: the marginal social benefit of pollution is equal to the marginal social cost of pollution. Slide 49

Things that it may be helpful to remember when you get to the end of the course The idea that even in the presence of externalities an economy can always reach an efficient solution as long as transaction costs of making a deal are low is known as: the Coase theorem. Slide 50

Things that it may be helpful to remember when you get to the end of the course Suppose that the marginal benefit received from pollution is equal to its marginal cost. In this instance, we can assume that: society has achieved its socially optimal level of pollution. Slide 51

Things that it may be helpful to remember when you get to the end of the course Oscar owns a meat processing plant that emits unpleasant odors that waft across the city. Because his production of processed meat provides a negative externality to the community, the government should: impose a tax on Oscar's production of processed meat because the market quantity is greater than the socially optimal quantity. Slide 52

Things that it may be helpful to remember when you get to the end of the course The marginal social cost of a unit of pollution: is equal to the sum of the highest willingness to pay among all members of society to avoid that unit of pollution. Slide 53

Things that it may be helpful to remember when you get to the end of the course Marginal social benefit of pollution: is the benefit to society of one more unit of pollution. Slide 54

Things that it may be helpful to remember when you get to the end of the course An emissions tax will: ensure that the marginal benefit of pollution is equal for all sources of pollution. Slide 55

Things that it may be helpful to remember when you get to the end of the course Firm A and Firm B both produce a good that causes pollution, but both firms differ in their marginal benefit from pollution. In this case, an emissions standard would: not be effective since it does not take into account differences in marginal benefits. Slide 56

Things that it may be helpful to remember when you get to the end of the course Pigouvian taxes: are taxes designed to reduce external costs. Slide 57

Things that it may be helpful to remember when you get to the end of the course Markets for the right to pollute are: created by government when it issues tradable pollution permits. Slide 58

Things that it may be helpful to remember when you get to the end of the course Both emissions taxes and tradable emissions permits: are examples of efficient cost-minimizing methods of pollution reduction. Slide 59

Things that it may be helpful to remember when you get to the end of the course Positive externalities are: difficult to measure since marginal benefits are hard to observe. Slide 60

Things that it may be helpful to remember when you get to the end of the course Flu vaccines often provide both private benefits to individuals and positive external benefits to other members of society. As a result, without government intervention one would find: too few flu vaccines being produced since external benefits would not be considered. Slide 61

Things that it may be helpful to remember when you get to the end of the course Suppose each person in a community had to pay for his or her own education from kindergarten through high school. One would expect that: less education would be acquired since society has not considered the positive external benefits of education. Slide 62

Things that it may be helpful to remember when you get to the end of the course In order to encourage consumption of a good that generates positive externalities, policymakers would: provide a subsidy per unit of the good consumed in order to achieve the socially optimal level. Slide 63

Things that it may be helpful to remember when you get to the end of the course Policies aimed at supporting industries that yield positive externalities such as technological spillover are referred to as: industrial policies. Slide 64

Things that it may be helpful to remember when you get to the end of the course A good is subject to a network externality when: an increase in the number of other people using the good increases its value to an individual. Slide 65

Things that it may be helpful to remember when you get to the end of the course Network externalities are often: a reason for natural monopolies. Slide 66

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What to do this week! Read my announcements Read chapter 17 Post to the discussion (before Saturday night) Post to the discussion on 3 separate days Post to at least TWO classmates’ Discussion Do the assignment Remember to include references Come to me when you have a question. Slide 68

This week’s Discussion Topic Summarize your research paper Slide 69

This week’s Assignment Marginal costs, marginal benefit and societal benefit of education Slide 70

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Slide # 72 Remember to complete your final exam next week

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Slide # 76 Microeconomics.