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OU ECON 1123 - Externalities

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ECON 1123 1st Edition Lecture 16Outline of Last LectureI. The theory of pure monopolyA. Characteristics of Pure MonopolyB. Monopoly ProfitsOutline of Current LectureI. Monopoly and Economic EfficiencyII. An extension of the competitive model: ExternalitiesA. Characteristics of Private goods and public goodsB. Positive externalities: External BenefitsC. Negative Externalities: External CostsCurrent LectureI. Monopoly and Economic EfficiencyPure competition is efficient, monopoly is not. In monopoly, Price>MC… This is a gap that implies inefficiencyII. An extension of the competitive model: ExternalitiesA. Characteristics of Private goods and public goodsPrivate good characteristics: (hamburgers, cars)1)Rival in Consumption: (consumption by one person reduces consumption by others, he gets the product you don’t… because there is only one of it and if he got it then it is not available to you.)2)Exclusion of non-payers is relatively easy by charging market pricePublic good characteristics: (National Defense, Flood Control Project)1)Nonrival consumption: Consumption by one person does not necessarily reduce consumption by others2)Exclusion of non-payers (free-riders) from consumption of a public good is difficult or costly***Externalities- Effects of economic activities that are not taken into account by voluntary market-exchanges, rather these effects are external to the market mechanismThese 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.Mixed goods with both private and public good characteristics are what generateexternalities.B. Positive externalities: External Benefits-has private characteristics: private goods w/ individual rival benefits-public good characteristics: Better education-> faster technological progress for everyone, better education produces more knowledge, better education produces better health careIndividually, you come to OU to get yourself a higher paying job which is a privatematter but if your education in turn helps society then that is a positive externalityDexternal- society’s demand for the non-rival public good benefits of education (pseudo demand schedule revealed through political rather than economic processes)Qsociety- optimal ouput taking into account both private and public benefits of education-when Q society>Q private the competitive market fails to provide the socially efficient output-market only takes into account what you’re willing to pay for-implies that the government should undertake policies to increase the output ofeducation beyond Q private. Examples: Subsides, student loans, government


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