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UI ECON 1100 - Externality examples
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ECON 1100 1nd Edition Lecture 31 Outline of Last Lecture I. ScheduleII. ExamIII. GradingIV. ExternalitiesOutline of Current Lecture I.ExternalitiesCurrent LectureI. ExternalitiesExample 1B. Joel’s fence blocks C. Simon’s view of oceanWhat’s the efficient outcome?Have to know the costs and benefits to determineSuppose:Billy values privacy @ $1 milCarly values view @ $1.5 milEfficient choice = no fence -> C higher value than BUse resource in way that is valued mostIf C has legal right to view, this will be enforced in courtNo fence & this is efficient If B has legal right to build fenceCarly Pays Billy $1.25 mil to not build & that’s efficientThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Just because you have the right to do something, doesn’t mean you’ll do it, for enough $, you’ll sell the rightSo long as we know who has right to decide & negotiation is easy, we get (A) some result& (B) it’s the efficient resultThis is called the Coase TheoremSuppose instead Billy values privacy @ $2 mil Example 2Water pollution -> clean or dirty waterEconomist’s view of this is different than ‘normal’ people and environmentalistsSuppose:Factory values putting waste into river @ $1 milTown values clean river water @ $1.5 milEfficient? w/ these values clean water is the efficient choiceRight to decide belongs to town: clean water = efficientRight to decide belongs to factory: offered $ by town = clean water =


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UI ECON 1100 - Externality examples

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