10 votes
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Is market failure constant? What properly defines it?

I have to intervene to say that market failure and externality are not the same thing. So I do not think it is at all correct to define market failure as when "the production or consumption of a ...
Ubiquitous's user avatar
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6 votes
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Is it right to derive social marginal benefit by adding individual prices instead of quantities?

Vertical summation of the individual marginal benefit curves is the correct way to find social marginal benefit if the camera system, so far as the two stores are concerned, is a public good. ...
Adam Bailey's user avatar
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5 votes
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Pareto optimality with externalities

I feel like I do not understand the exact meaning behind the notion of the Pareto optimality. It's not you. There are different senses of the phrase "Pareto Optimal," and you have to figure out ...
Bill's user avatar
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5 votes
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Relationship between the Tragedy of the Commons and negative externalities?

The reason why it boosts supply is that the costs are not born by produces. For example, since you can’t own fresh air due to lack of property rights (tragedy of the commons) firms don’t need to pay ...
1muflon1's user avatar
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5 votes

Externalities, Pigouvian Taxes and Wikipedia

The Pigovian taxes are non-distortionary. For example imagine situation where government optimal spending is 100e and before Pigovian tax all 100e was raised through income tax which creates ...
1muflon1's user avatar
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5 votes

Is the use/consumption of natural resources considered an externality per se?

Use or consumption of natural resources is not in mainstream economics considered as an externality per se. First of all the quote from Mankiw is probably from undergraduate textbook and taken out of ...
1muflon1's user avatar
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Understanding an article in the BMJ about the sugar tax

A little background. The paper relates to a tax (known as the Soft Drinks Industry Levy) introduced by the UK in 2018 on some soft drinks, levied on manufacturers (not consumers), with the aim, ...
Adam Bailey's user avatar
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5 votes
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Pigouvian tax with general utility function

The first order condition for individual $a$ when the price of $y$ equals $p_y(1+t)$ is given by: $$ \frac{\partial u_a}{\partial y_a} = p_y(1+t) \left(\frac{1}{p_x} \frac{\partial u_a}{\partial x_a} \...
tdm's user avatar
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5 votes

Positive externalities of cars - free seats on public transport

In order to answer this question we first have to properly and rigorously define externality. Externalities are often vaguely defined as any effects on third parties but the correct definition of ...
1muflon1's user avatar
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4 votes
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How can a free market be operated in a way that significant social and environmental costs are intrinsically covered?

As far as we can tell, no, there is no way to do it using only a free market. Coase postulated that within a free market, agents would negotiate private contracts to internalise the externalities. ...
410 gone's user avatar
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4 votes

Is market failure constant? What properly defines it?

To answer your other question of what properly defines market failure: The market fails when the socially desirable outcome is not achieved through the market. Since the market decisions are made ...
BB King's user avatar
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4 votes

Externality and Output

In principle in both positive and negative externality scenario government could just set price to the socially efficient price. However, outside of static textbook example this is non-starter. The ...
1muflon1's user avatar
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4 votes

Externality and Output

For a government to address a positive externality by setting the price of a good to its socially efficient price would raise several difficulties. The diagram below relates to the case of a good ...
Adam Bailey's user avatar
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3 votes

Are obstructed views a negative externality?

In general, yes it's an externality: it's a cost borne by others. How do we know it's a cost with real economic value? Because in general, properties with good light and better views tend to attract ...
410 gone's user avatar
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3 votes
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Has the "dismal theorem" practical implications?

My conclusion based on reading his paper is that the utility function of an individual or society can't be of the CRRA form presented in the paper. That would indeed lead to scenarios where you could ...
Dole's user avatar
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3 votes
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Understanding at a quote about externalities in law and economics

You don't give the source of the quote, but presumably what is meant is this. Whether X's production or consumption of a good affects Y (in a physical way such as smoke from X's factory or noise from ...
Adam Bailey's user avatar
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3 votes
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Negative consumer externality vs demerit good - what's the difference?

Demerit goods are goods where it is agreed by society that consumption is harmful for the consumer yet it is still consumed due to bounded rationality or because you disagree with society while ...
Giskard's user avatar
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3 votes
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What are the current economic theories of product advertising?

There is a vast literature in both economics and marketing on advertising. Some highlights relevant to your specific question: A classic paper (Grossman and Shapiro 1984) looks at competitive ...
Ubiquitous's user avatar
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3 votes
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Who pays externalities?

If negative externalities are priced into the market via a pigouvian tax, then those responsible for the negative externalities pay. As a whole, the public is better off. Firstly because the market ...
410 gone's user avatar
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3 votes
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Optimal Price and Quantity of Externality

Your steps look correct. There is one small typo in the first $\frac{\partial \mathcal L}{\partial h}$: the term $-4h(h-10)$ should have been $-4(h-10)$. The results also look reasonable: Regardless ...
Herr K.'s user avatar
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3 votes

Optimal Price and Quantity of Externality

Given that you already know the welfare maximizing level $h=5$ from your previous question, another approach would be to just consider that any optimal take-it-or-leave-it offer can be divided into ...
VARulle's user avatar
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3 votes

Positive externalities of cars - free seats on public transport

Effects that follow from rivalry are usually not considered to be economic externalities. From Wikipedia: In economics, a good is said to be rivalrous or a rival if its consumption by one consumer ...
Giskard's user avatar
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3 votes

Should firecrackers which disturb neighbours be a production externality or consumption externality?

You are correct: in the circumstances described the disturbance to neighbours constitutes a negative consumption externality. I have tried to imagine why someone might think the externality is on the ...
Adam Bailey's user avatar
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2 votes
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Externalities - First order conditions

To make sure it's completely explicit: superscripts below are indices referring to either firm $1$ or firm $2$. The choice variables in this problem are $\mathbf{q}^2$ and $\beta$. Notice that $\...
Theoretical Economist's user avatar
2 votes

Why does the European Union give subsidies to farmers?

The governments want to ensure that there is enough food for their people even if international food trade breaks down (for example due to trade war, war, or famine). A secondary objective is that ...
Klas Lindbäck's user avatar
2 votes

Why does the European Union give subsidies to farmers?

Markets are extremely poor at pricing events that have very low probability and catastrophic impacts. In part because we're very bad at estimating low-probability events: by definition, they're rare. ...
410 gone's user avatar
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2 votes

Is there really an "efficient equilibrium *price*" with externalities?

The blue lines are labelled as being costs, not prices. The line labelled "Private Cost" represents quantity supplied for a particular cost to the consumer. The line labelled "Social Cost" represents ...
Acccumulation's user avatar
2 votes

Are risk-costs a form of external costs?

In the particular case of nuclear power plants, yes, the risk cost can be considered as a negative externality. That's because nuclear power plant operators are explicitly limited by law in their ...
410 gone's user avatar
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