Land:

• Supply perfectly inelastic (vertical line)
• Economic Rent: Payment above minimum needed to keep factor in current use
• Land rent is entirely economic rent (opportunity cost ≈ 0)
• Marginal Social Benefit MSB
• Marginal Social Cost MSC
• Social Optimal Quantity

Land:

• Supply perfectly inelastic (vertical line)
• Economic Rent: Payment above minimum needed to keep factor in current use
• Land rent is entirely economic rent (opportunity cost ≈ 0)
• Marginal Social Benefit MSB
• Marginal Social Cost MSC
• Social Optimal Quantity

Land:

• Supply perfectly inelastic (vertical line)
• Economic Rent: Payment above minimum needed to keep factor in current use
• Land rent is entirely economic rent (opportunity cost ≈ 0)
• Marginal Social Benefit MSB
• Marginal Social Cost MSC
• Social Optimal Quantity

Negative Externality:

• Example: Factory polluting a river
• Social Marginal Cost (SMC) > Private Marginal Cost (PMC)
• Market produces too much ($Q_{market} > Q_{social}$)

Positive Externality:

• Example: Vaccinations reduce infection risk for others
• Social Marginal Benefit (SMB) > Private Marginal Benefit (PMB)
• Market produces too little
• Corrections:
• Subsidy to producers/consumers
• Government direct provision (public education)

Negative Externality:

• Example: Factory polluting a river
• Social Marginal Cost (SMC) > Private Marginal Cost (PMC)
• Market produces too much ($Q_{market} > Q_{social}$)
• Corrections:
• Pigovian tax: Tax shifts PMC up to equal SMC
• Command-and-control (cap or technology standards)
• Tradeable emissions permits

Positive Externality:

• Example: Vaccinations reduce infection risk for others
• Social Marginal Benefit (SMB) > Private Marginal Benefit (PMB)
• Market produces too little
• Corrections:
• Subsidy to producers/consumers
• Government direct provision (public education)

Definition: Economic activities that impose costs/benefits on uninvolved third parties

Negative Externality:

• Example: Factory polluting a river
• Social Marginal Cost (SMC) > Private Marginal Cost (PMC)
• Market produces too much ($Q_{market} > Q_{social}$)
• Corrections:
• Pigovian tax: Tax shifts PMC up to equal SMC
• Command-and-control (cap or technology standards)
• Tradeable emissions permits

Positive Externality:

• Example: Vaccinations reduce infection risk for others
• Social Marginal Benefit (SMB) > Private Marginal Benefit (PMB)
• Market produces too little
• Corrections:
• Subsidy to producers/consumers
• Government direct provision (public education)

Coase Theorem:

• If property rights clearly defined and transaction costs = 0, private negotiation achieves social optimum (no need for government)
• In reality, transaction costs are usually high
• Graphing Externalities and DWL
• Negative Consumption Externality
• Negative Production Externality
• Per-Unit Subsidies for Positive Externalities
• Per-Unit Taxes for Negative Externalities
• Positive Consumption Externality
• Positive Production Externality

Cannot prevent non-payers from using

One person's consumption doesn't reduce availability to others

• People wait for others to pay and then benefit for free
• Private market undersupplies or doesn't provide
• Solution: Government provision (national defense, lighthouses, streetlights)

Negative Externality:

• Example: Factory polluting a river
• Social Marginal Cost (SMC) > Private Marginal Cost (PMC)
• Market produces too much ($Q_{market} > Q_{social}$)

Positive Externality:

• Example: Vaccinations reduce infection risk for others
• Social Marginal Benefit (SMB) > Private Marginal Benefit (PMB)
• Market produces too little
• Corrections:
• Subsidy to producers/consumers
• Government direct provision (public education)

Lorenz Curve:

• x-axis: Cumulative percentage of population
• y-axis: Cumulative percentage of income
• Perfect equality: Diagonal line; Actual: Below diagonal

• x-axis: Cumulative percentage of population
• y-axis: Cumulative percentage of income
• Perfect equality: Diagonal line; Actual: Below diagonal

$G = \frac{\text{Area between Lorenz curve and diagonal}}{\text{Total area below diagonal}}$

• G = 0: Perfect equality
• G = 1: Perfect inequality
• U.S. G ≈ 0.39-0.41

Redistribution policies:

• Progressive tax: Higher-income earners pay higher rates (federal income tax)
• Transfer payments: Medicaid, SNAP, EITC
• Minimum wage