Post on 02-Jan-2016
Managerial EconomicsJack Wu
Externalitiesone party directly conveys benefit or cost to
others� positive� negative
benchmark: collective marginal benefit = collective marginal cost
Externalities (c) 1999-2001, Ivan Png 3
Saks: Fifth Avenue vs Mall New York, NY: 611 Fifth Avenue Stamford, CT: Town Center Mall Chevy Chase, MD: 5555 Wisconsin Ave McClean, VA: Tysons Galleria
0
0.81
3.64
15
13.4
10
9
1 5 9 10
group marginal benefit
Sak’s marginal benefit
florist’s marginalbenefit
profit gain fromadditional investment
marginalcost
shoe store’smarginal benefit
Hundred thousand dollars of investment
Marg
inal benefit/
cost
(Hundre
d t
housa
nd d
olla
rs)
Sak’s Positive Externalities
0
1
2
10
5 7.5 9 10
ab
c
marginal benefit
group marginal cost
Sol’s marginal cost
Sak’s marginal cost
Hundred thousand dollars of investment
Marg
inal benefit/
cost
(H
undre
d t
housa
nd
dolla
rs)
Sak’s Negative Externalities
profit gain fromreducing investment
Externalities (c) 1999-2001, Ivan Png 6
Silicon Valley Stanford University Xerox Palo Alto Research Center
Hewlett-Packard Cisco Systems 3Com Yahoo!
Externalities (c) 1999-2001, Ivan Png 7
• London: The City• New York: Wall Street• Hong Kong: Central• Singapore: Raffles Place
Financial Centers
Resolving ExternalitiesEconomic inefficiency opportunity for profit merger collective action
Externalities (c) 1999-2001, Ivan Png 9
Intel InsideCooperative advertising resolves positive externality from one retailer to other retailers
Network ExternalityExternality where benefit/cost depends on total number in network English language Internet email international telephone service
Network Effectbenefit/cost depends on total number in network through market, not directly conveyed resolved by producer or service provider
Critical Massdefinition: number of
users at which demand becomes positive
Network Effects: Demand Elasticity
highly elastic around tipping pointhighly inelastic at low demand levels
Public GoodNon-rival consumption -- one person’s increase does not reduce quantity to others
extreme economy of scale
Externalities (c) 1999-2001, Ivan Png 15
TelevisionDistinguishcontentdelivery
private good public goodcongestible
rival consumption non-rival consumption
Rivalness
0
0.81
3.64
4.55
5.6
8.9
10
10541
vertical sum of marginal benefits
marginal cost
Minutes of fireworks
Marg
inal benefit/
cost
($
per
min
ute
)
Alan
Mary
Peter
Efficiency in Public Good
ExcludabilityProvider can exclude particular consumer law technology
Excludability: Law patent – product or process copyright – artistic expression
Externalities (c) 1999-2001, Ivan Png 20
Intellectual Propertytrade-offbenefit from usageincentive for future creation
DiscussionLet b represent marginal benefit and q the
amount of Sogo’s investment in the new ZhongXiao Fushing store. Suppose that the investment generates marginal benefis, b=10-q for Sogo, b=4-0.4q for the florist, and b=1-0.2q for the shoe store. Given the marginal cost of 1, calculate the profit-maximizing quantity of Sogo’s investment and the economically efficient quantity of Sogo’s investment.