University:
Massachusetts Institute of Technology
Course:
15.501/516 | Accounting
Academic year:

2023
Views:

168

Pages:

3
Author:

EncuncBicmtn

APPLIED ECONOMICS FOR MANAGERS SESSION 12— I. EXTERNALITIES A. COSTS OR BENEFITS CONFERRED ON PARTIES NOT REPRESENTED IN THE TRADE B. PRICE NEGOTIATED IN THE MARKET DOES NOT REFLECT TRUE MARGINAL COST/MARGINAL BENEFIT ⇒ INEFFICIENT II. MARKET FAILURE OR A FAILURE TO USE MARKETS A. MARKETS AND PROPERTY RIGHTS 1. PROPERTY RIGHTS AS A MARKET NECESSITY 2. ABSENCE OF PROPERTY RIGHTS AS THE SOURCE OF EXTERNALITY PROBLEMS 3. RE-INTRODUCTION OF THE MARKET REQUIRES REINTRODUCTION OF PROPERTY RIGHTS B. COASE, PROPERTY RIGHTS, AND EFFICIENCY C. THE PROBLEM IN FIJENSEA 1. MECHANISMS TO REINTRODUCE PROPERTY RIGHTS 2. EFFLUENT/EMISSION TAXES: GENERATE TAX REVENUE USEFUL FOR MITIGATING POLLUTION DAMAGE OR FOR OTHER PUBLIC SERVICES 3. INCENTIVE TO DEVELOP LESS POLLUTION-PRODUCING TECHNIQUES OR LESS COSTLY WAYS TO LIMIT POLLUTION 4. LEAST-COST WAY OF DESIRED POLLUTION REDUCTION 5. TRADABLE PERMITS: a. NO NEED TO SET THE TAX “RATE” b. SELF-ENFORCING MECHANISM III. EXTERNALITIES WRITTEN IN LARGE—PUBLIC GOODS A. NON-RIVALRY IN CONSUMPTION—MARGINAL COST = 0 B. NON-EXCLUDABILITY—CAN’T EXCLUDE THOSE NOT PAYING 1. DEFENSE 2. INFORMATION C. PRICING AND FINANCING PUBLIC GOODS 1. EXAMPLE: DEMAND: P = 100 – Q TOTAL COST: TC = 1600 AVERAGE COST: AC = (1600/Q) MARGINAL COST: MC = 0 2. MC < AC ⇒ AC IS FALLING $/UNIT $100 $20 80 100 Q SURPLUS CALCULATIONS: TOTAL COST = $1600 ALWAYS AVERAGE COST PRICING: MARGINAL COST PRICING: D. QUASI-PUBLIC GOODS P = $20, PRODUCER SURPLUS = 0, CONSUMER SURPLUS = $3200 PRODUCER SURPLUS = – $1600 CONSUMER SURPLUS = $5,000 E. MARGINAL COST PRICING ALWAYS MAXIMIZES TOTAL SURPLUS—BUT HOW TO ACHIEVE IT FOR A PUBLIC GOOD? 1. AVERAGE COST PRICING AND NATURAL MONOPOLIES 2. PRICE DISCRIMINATION 3. TAXES/SUBSIDIES IV. NETWORK EXTERNALITIES/DEMAND SCALE ECONOMIES A. VALUE TO EACH CONSUMER INCREASES AS MORE CONSUMERS USE THE PRODUCT B. PROBLEMS 1. ESTABLISHING AND PRICING A NETWORK 2. COMPETITION IS QUESTION OF SURVIVAL/NATURAL MONOPOLIES? 3. COMPLEMENTARITIES AND PATH DEPENDENCE