Ch07 - Externalities0

Ch07 - Externalities0 - 1 Chapter 7 Externalities...

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Unformatted text preview: 1 Chapter 7 Externalities & the Social Optimum 2 Introduction Recall: Adam Smiths invisible hand of the marketplace leads self-interested buyers and sellers in a market to maximize the total benefit that society can derive from a market. But market failures can still happen. 3 Externalities & Market Inefficiency An externality refers to the uncompensated impact of one persons actions on the well-being of a bystander . Externalities cause markets to be inefficient, and thus fail to maximize total surplus. 4 Externalities & Market Inefficiency An externality arises... . . . when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect. 5 Externalities & Market Inefficiency When the impact on the bystander is adverse, the externality is called a negative externality . When the impact on the bystander is beneficial, the externality is called a positive externality . 6 Externalities & Market Inefficiency Negative Externalities Automobile exhaust Cigarette smoking Barking dogs (loud pets) Loud stereos in an apartment building 7 Externalities & Market Inefficiency Positive Externalities Restored historic buildings Research into new technologies 8 The Market for Aluminum Quantity of Aluminum Price of Aluminum Equilibrium Demand (private value) Supply (private cost) Q MARKET 9 Externalities & Market Inefficiency Negative externalities lead markets to produce a larger quantity than is socially desirable. Positive externalities lead markets to produce a smaller quantity than is socially desirable. 10 Welfare Economics: A Recap The Market for Aluminum The quantity produced and consumed in the market equilibrium is efficient in the sense that it maximizes...
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Ch07 - Externalities0 - 1 Chapter 7 Externalities...

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