Chapter 10 Notes - Chapter 10 Notes Externality...

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Chapter 10 Notes Externality- uncompensated impact of one person’s actions on the well being of a bystander Positive- lead markets to produce a smaller quantity than is socially desirable Negative- leads markets to produce a larger quantity than is socially desirable Affects well being of market participants as well as others indirectly Market equilibrium inefficient in presence of externalities Gov’t often acts to preserve the interests of bystanders affected by the externality Negative externalities can increase costs of production for society beyond the costs of production for producers- private costs + external costs Internalizing the externality- altering incentives (ie taxes/subsidies) so that people take account of the external effects of their actions Ie a well-designed tax would raise the private costs of production up to equal the cost after external cost is factored in Ie a subsidy could encourage people to get more education; the subsidy would
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