CHAPTER 10 EXTERNALITIES1In 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?
CHAPTER 10 EXTERNALITIES2IntroductionRecall 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.
CHAPTER 10 EXTERNALITIES3IntroductionOne 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
CHAPTER 10 EXTERNALITIES4IntroductionSelf-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.
CHAPTER 10 EXTERNALITIES5Pollution: A Negative ExternalityExample 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
CHAPTER 10 EXTERNALITIES6Other Examples of Negative Externalitiesthe neighbor’s barking doglate-night stereo blasting from the dorm room next to yoursnoise pollution from construction projectstalking on cell phone while driving makes the roads less safe for othershealth risk to others from second-hand smoke
CHAPTER 10 EXTERNALITIES7Positive Externalities from EducationA 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 votersPeople 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
CHAPTER 10 EXTERNALITIES8Other Examples of Positive ExternalitiesBeing vaccinated against contagious diseases protects not only you, but people who visit the salad bar or produce sectionafter you. R&D creates knowledge others can useRenovating your house increases neighboring property valuesThank you for not contaminating the fruit supply!
CHAPTER 10 EXTERNALITIES90123450102030Q(gallons)P$The market for gasolineRecap of Welfare EconomicsDemand curve shows private value, the value to buyers (the prices they are willing to pay)Supply curve shows
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- Spring '11
- Externalities, Market failure, DICK, Externality