Tutorial 1

👩‍💼 Private Externalities

These are the spillover effects an action has directly on another individual. It is different than public because a private externality has a limited number of affected individuals.

Private Negative Externality: If a farmer overuses fertilizer, the resulting soil depletion reduces their neighbour's yields. 

Private Positive Externality: If a farmer provides their workers credits for training courses, the workers' own productivity rises.

👨‍👩‍👧‍👦 Public Externalities

These are the spillover effects an action has on others in society, beyond the agent who made the decision. They are “external” in the classic sense, costs or benefits not borne by the person/firms that created them.

Public Negative Externality: If the same farmer’s fertilizer runoff pollutes a nearby river, it harms the fishing community.

Public Positive Externality: If the farmer maintains a tree cover that absorbs carbon dioxide, the benefit is shared by everyone.

⚖️ Government Cost-Benefit Analysis

The government will take the perspective of a social planner. They will consider the private + public benefits of smoking marijuana against the private + public costs of smoking marijuana. Similar to Supply-Demand analysis (Supply = private marginal cost; Demand = private marginal benefit), the government will choose a policy where the social marginal cost = social marginal benefit. 

Social Marginal Cost = Private Marginal Cost + Private/Public Negative Externalities

Social Benefit Cost = Private Marginal Benefit + Private/Public Positive Externalities

🚬 Marijuana Regulations

• Both cigarettes and marijuana create negative public and private health externalities.  

• There are grey markets. Illegally sold cigarettes, like illegally sold marijuana, compete as substitutes with legally sold cigarettes and legally sold marijuana. 

• If cigarette regulation is optimal (and it might not be), then marijuana regulation should be similar.