chapter 10 - In this chapter look for the answers to these questions What is an externality Why do externalities make market outcomes inefficient How

chapter 10 - In this chapter look for the answers to these...

This preview shows page 1 - 10 out of 43 pages.

0 CHAPTER 10EXTERNALITIES In this chapter, look for the answers to these questions: What is an externality? Why do externalities make market outcomes inefficient? How can people sometimes solve the problem of externalities on their own? Why do such private solutions not always work? What public policies aim to solve the problem of externalities?
Background image
1 CHAPTER 10EXTERNALITIES Introduction Recall one of the Ten Principles from Chap. 1: Markets are usually a good way to organize economic activity. Lesson from Chapter 7: In the absence of market failures, the competitive market outcome is efficient, maximizes total surplus.
Background image
2 CHAPTER 10EXTERNALITIES Introduction One type of market failure: externalities. Externality: the uncompensated impact of one person’s actions on the well-being of a bystander Negative externality: the effect on bystanders is adverse Positive externality: the effect on bystanders is beneficial
Background image
3 CHAPTER 10EXTERNALITIES Introduction Self-interested buyers and sellers neglect the external effects of their actions, so the market outcome is not efficient. Another principle from Chapter 1: Governments can sometimes improve market outcomes.
Background image
4 CHAPTER 10EXTERNALITIES Pollution: A Negative Externality Example of negative externality: Air pollution from a factory. The firm does not bear the full cost of its production, and so will produce more than the socially efficient quantity. How govt may improve the market outcome: Impose a tax on the firm equal to the external cost of the pollution it generates
Background image
5 CHAPTER 10EXTERNALITIES Other Examples of Negative Externalities the neighbor’s barking doglate-night stereo blasting from the dorm room next to yours noise pollution from construction projects talking on cell phone while driving makes the roads less safe for others health risk to others from second-hand smoke
Background image
6 CHAPTER 10EXTERNALITIES Positive Externalities from Education A more educated population benefits society: lower crime rates: educated people have more opportunities, so less likely to rob and steal better government: educated people make better-informed voters People do not consider these external benefits when deciding how much education to “purchase”Result: market eq’m quantity of education too lowHow govt may improve the market outcome: subsidize cost of education
Background image
7 CHAPTER 10EXTERNALITIES Other Examples of Positive Externalities Being vaccinated against contagious diseases protects not only you, but people who visit the salad bar or produce section after you. R&D creates knowledge others can use Renovating your house increases neighboring property values Thank you for not contaminating the fruit supply!
Background image
8 CHAPTER 10EXTERNALITIES 0 1 2 3 4 5 0 10 20 30 Q(gallons) P$ The market for gasolineRecap of Welfare Economics Demand curve shows private value, the value to buyers (the prices they are willing to pay) Supply curve shows private cost
Background image
Image of page 10

You've reached the end of your free preview.

Want to read all 43 pages?

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes