ch15 - Chapter 15 Externalities Externalities in Our Lives...

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Chapter 15 Externalities Externalities in Our Lives A cost or a benefit that arises from production and falls on someone other than the producer or a cost or a benefit that arises from consumption and falls on someone other than the consumer is called an externality . An externality can arise from either production or consumption and it can be either a negative externality , which imposes an external cost, or a positive externality , which provides an external benefit. Negative Externalities: Pollution A private cost of production is a cost that is borne by the producer of a good or service. Marginal cost is the cost of producing an addiional unit of a good or service. t Marginal private cost is the cost of producing an additional unit of a good or service that is borne by the producer of that good or service. An external cost is a cost of producing a good or service that is not borne by the producer but borne by other people. A marginal external cost is the cost of producing an additional unit of a good or service that falls on people other than the producer. Marginal social cost is the marginal cost incurred by the entire society—by the producer and by everyone else on whom the cost falls—and is the sum of marginal private cost and marginal external cost. The figure shows an example of the relationship between output and cost in a chemical industry that pollutes a waterway. Homeowners live along the waterway. When the quantity of chemicals produced increases, the amount of pollution increases and the external cost of pollution increases. When an industry is unregulated, the amount of pollution it creates depends on the market equilibrium price and the quantity of the good produced.
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In the figure, the demand curve D also measures the marginal benefit, MB , to the buyers of the chemical. The supply curve
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ch15 - Chapter 15 Externalities Externalities in Our Lives...

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