101-21_07 - Econ 101 Lecture 21 Externalities Sometimes...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Econ 101 Lecture 21 Externalities Sometimes costs or benefits that result from an activity accrue to people not directly involved in the activity. These are called external costs or external benefits -- externalities for short. Example 21.1 . Sara is an accomplished classical violinist. Her neighbor Tom is a fan of classical violin music, and on summer evenings enjoys listening to Sara play in her garden. If Sara plays only in response to her own costs and benefits, will the amount of time she plays be socially optimal? For Tom, Sara's music is a positive externality. If Sara plays in response to her own costs and benefits, she will continue to play until the marginal benefit of playing another minute is equal to the marginal cost. But since Tom also benefits from her playing, at that point the total marginal benefit of playing another minute will be greater than the marginal cost. It follows that Sara plays too little. Marginal Cost to Sarah Marginal Benefit to Sarah Minutes T* ($/minute) 0.50 0.65 MB to Tom Example 21.2 . Sara is an accomplished classical violinist. Her neighbor Harry hates the sound of violin music, and on summer evenings becomes distressed when Sara plays in her garden. If Sara plays only in response to her own costs and benefits, will the amount of time she plays be socially optimal? For Harry, Sara's music is a negative externality. If Sara plays in response to her own costs and benefits, she will continue to play until the marginal benefit of playing another minute is equal to the marginal cost. But since Harry also incurs costs from her playing, at that point the marginal benefit of playing another minute will be smaller than their combined marginal costs. If follows that Sara plays too much. Marginal Cost to Sarah Marginal Benefit to Sarah Minutes T* ($/minute) 0.50 0.75 MC to Harry Negative externalities => too much activity Positive externalities => too little activity Example 21.3 . Smith can produce with or without a filter on his smokestack. Production without a filter results in greater smoke damage to Jones. The relevant gains and losses for the two individuals are listed in the table below. With filter Without filter ___________________________________ Gains to Smith $200/wk $245/wk ___________________________________ Damage to Jones $35/wk $85/wk ___________________________________ If Smith is not liable for smoke damages and if the two parties can negotiate costlessly with one another, will he install a filter?
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Note first that the total well being of Smith and Jones together goes up if Smith installs the filter: $200-$35=$165 > $245-$85=$160. The filter costs $245-$200=$45. Smith doesn't have to install it, but if Jones pays him at least $45, he will gladly do so. And since the filter results in savings of $84-$35=$50 for Jones, he will pay Smith to install the filter.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/27/2008 for the course ECON 1110 taught by Professor Wissink during the Spring '06 term at Cornell University (Engineering School).

Page1 / 6

101-21_07 - Econ 101 Lecture 21 Externalities Sometimes...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online