C2 - Externalities and government policy.pptx - EXTERNALITIES AND GOVERNMENT POLICY Assistant Professor Meri \u0160uman Toli\u0107 Learning Objectives \u2022 What

C2 - Externalities and government policy.pptx -...

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EXTERNALITIES AND GOVERNMENT POLICY Assistant Professor Meri Šuman Tolić
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Learning Objectives What are externalities? Use a supply-and-demand analysis to show how a negative or positive externality prevents a perfectly competitive market from achieving efficiency. What does it mean to internalize an externality? Explain how corrective taxes and subsidies can be used to internalize an externality
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Externalities are costs or benefits of market transactions not reflected in prices. When an externality prevails, a third party (other than the buyers or sellers of an item) is affected by its production or consumption . Positive/negative Production/consumption
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Externalities The benefits or costs of the third party (either a household or a business) are not considered by either buyers or sellers of an item whose production or use results in an externality. The third parties are people like you who bear the costs of polluted air and water. These third parties often organize politically through groups to lobby legislators and public officials to protect their rights to a clean environment. Environmentalists have emerged as an effective, potent political force to induce governments to pass laws that limit the rights of producers and consumers to emit wastes that pollute the air, water, and land. Market prices do not accurately reflect either all the marginal social benefit or all the marginal social cost of traded items when an externality is involved.
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Negative externalities ( external costs) are costs to third parties other than the buyers or the sellers of an item not reflected in the market price. Eg. negative productive externality: damage done by industrial pollution to people and their property→ the harmful effects to good health and reductions in the value of business and personal property and resources. dissatisfaction caused by the noise of low-flying aircraft as experienced by residents who are located near an airport. negative consumption externality: noise caused by loud music
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Positive externalities ( external benefits) are benefits to third parties other than the buyers or the sellers of a good or service not reflected in prices. Buyers and sellers of goods that, when sold, result in positive externalities, do not consider the fact that each unit produced provides benefits to others. For example, a positive externality is likely to exist for fire prevention, because the purchase of smoke alarms and fireproofing materials benefits those other than the buyers and sellers by reducing the risk of the spread of fire. Buyers and sellers of these goods do not consider the fact that such protection decreases the probability of damage to the property of third parties.
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