EXTERNALITIES 1 INTRODUCTION TO ENVIRONMENTAL ECONOMICS AND PUBLIC POLICY LECTURE 11: EXTERNALITIES FEBRUARY 21, 2017 1
In this chapter, In this chapter, look for the answers to these look for the answers to these questions: questions: What is an externality? Why do externalities make market outcomes inefficient? What public policies aim to solve the problem of externalities? How can people sometimes solve the problem of externalities on their own? Why do such private solutions not always work? 2
EXTERNALITIES 3 Introduction One of the principles from Chapter 1: Markets are usually a good way to organize economy activity. In absence of market failures, the competitive market outcome is efficient, maximizes total surplus. One type of market failure: externality , Externalities can be negative or positive , depending on whether impact on bystander is adverse or beneficial.
EXTERNALITIES 4 Introduction Self-interested buyers and sellers Another principle from Chapter 1: Governments can sometimes improve market outcomes.
EXTERNALITIES 5 Examples of Negative Externalities Air pollution from a factory The neighbor’s barking dog Late-night stereo blasting from the dorm room next to yours Noise pollution from construction projects Health risk to others from second-hand smoke Talking on cell phone while driving makes the roads less safe for others
EXTERNALITIES 6 0 1 2 3 4 5 0 10 20 30 Q (gallons) P $ The market for gasoline Recap of Welfare Economics Demand curve shows private value , Supply curve shows private cost , The market eq’m maximizes consumer + producer surplus. $2.50 25
EXTERNALITIES 7 0 1 2 3 4 5 0 10 20 30 Q (gallons) P $ The market for gasoline Analysis of a Negative Externality Supply (private cost) External cost = Social cost =
EXTERNALITIES 8 0 1 2 3 4 5 0 10 20 30 Q (gallons) P $ The market for gasoline Analysis of a Negative Externality D S Social cost 25
EXTERNALITIES 9 0 1 2 3 4 5 0 10 20 30 Q (gallons) P $ The market for gasoline Analysis of a Negative Externality D S Social cost Market eq’m ( Q = 25) is _________ social optimum ( Q = 20). 25 One solution:
EXTERNALITIES 10 “ Internalizing the Externality ” Internalizing the externality : In our example, (Imposing the tax on buyers would achieve the same outcome; market Q would equal optimal Q .)
EXTERNALITIES 11 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.