TAILIEUCHUNG - Lecture note Public finance (10th Edition) - Chapter 5: Externalities

Chapter 5 summary: Externalities occurs when the activity of one person or firm positively or negatively affects another person/group/firm outside the market mechanism; an inefficient allocation of resources results because the market price does not reflect the external costs or benefits; the coase theorem indicates that private solutions through bargaining can achieve the efficient outcome under certain circumstances. | EXTERNALITIES Chapter 5 ©2014 by McGraw-Hill Education. All Rights Reserved. Externalities Externality – An activity of one entity that affects the welfare of another entity in a way that is outside the market mechanism A paper mill’s production of the carcinogen dioxin increases society’s health care costs; these costs to society are not included in the paper mill’s paper price However, when large numbers of suburbanites relocate to a city, society is affected, although the effect is captured through higher prices of city housing ©2014 by McGraw-Hill Education. All Rights Reserved. 5- The Nature of Externalities Privately-owned vs. commonly-owned resources A privately owned resource: its price reflects its value so used efficiently (MSC=MSB) A commonly-owned resource (air, oceans): price ($0) does not reflect its value so used inefficiently (MSC>MSB) Externalities can be produced by consumers & firms Externalities are reciprocal in nature Externalities can be positive or

• Tài chính doanh nghiệp
• Public finance
• Lecture Public finance
• Public Economics
• Market mechanism
• Coase Theorem
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• Nature of externalities
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