Ch15 - Chapter 15: Externalities I. Externalities in Our...

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C h a p t e r   1 5 :   E x t e r n a l i t i e s I. Externalities in Our Lives A. An externality is a cost or benefit that arises from production and falls on someone other than the producer, or a cost or benefit that arises from consumption and falls on someone other than the consumer. 1. A negative externality imposes an external cost. 2. A positive externality creates an external benefit. B. There are four types of externality: 1 . Negative production externalities such as noise from aircraft and trucks, polluted rivers and lakes, the destruction of native animal habitat, air pollution in major cities from auto exhaust. 2. Positive production externalities such as honey and fruit production: a) Fruit production gets an external benefit from locating bee hives next to a fruit orchard, where the bees pollinate the trees to boost fruit output. b) Honey production gets an external benefit from the orchard trees that generate the pollen necessary for honey production. 3. Negative consumption externalities such as smoking in a confined space and posing a health risk to others, or having noisy parties or loud car stereos that disturb others. 4. Positive consumption externalities such as when everyone who comes into contact with you benefits because you’ve taken a flue vaccination, or when the owner of an historic building restores it and everyone who sees the building gets pleasure from it. II. Negative Externalities: Pollution A. Historically, pollution has been a significant problem. 1. Both rich industrial countries and poor developing countries face pollution challenges. 2. It is an economic problem that is coped with by balancing the benefits from the production or consumption processes that create the pollution and the externality costs from these same processes. B. The Demand for a Pollution-Free Environment Society demands for a pollution-free environment are expressed via the political process. This demand has increased for two reasons: 1. Higher incomes: A high-quality environment is a normal good so as the nation’s income has increased, the demand for a pollution-free environment has increased. 2. Greater awareness: Greater knowledge about the effects of pollution increases the demand to decrease pollution. C. There are three sources of environmental pollution problems: 1. Air pollution: In many developing nations, air pollution is getting worse, but in the United States air pollution from many prominent substances is declining. a) Figure 15.1 shows some 20-year trends in U.S. air pollution emissions, revealing a downward trend.
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b) Some scientists believe that global warming and ozone depletion are significant problems. 2. Water pollution: The largest source of water pollution are dumping industrial waste and treated sewage in lakes and rivers. 3.
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This note was uploaded on 04/03/2009 for the course ECON 2102 taught by Professor Bill during the Fall '08 term at Temple.

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Ch15 - Chapter 15: Externalities I. Externalities in Our...

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