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We burn huge quantities of fossil fuels—coal, natural gas, and oil—that cause acid rain and global warming. We dump toxic waste into rivers, lakes, and oceans. These environ- mental issues are simultaneously everybody’s problem and nobody’s problem. How can we take account of the damage that we cause others every time we turn on our heating or air- conditioning systems? Almost every day, we hear about a new discovery—in medicine, engineering, chemistry, physics, or even econom- ics. The advance of knowledge seems boundless. Ever more people are learning more and more of what is already known. The stock of knowledge is increasing, apparently with- out limit. But are we spending enough on research and edu- cation? Do enough people remain in school for long enough? In this chapter, we study the problems that arise because many of our actions affect other people, for good or ill, in ways that we do not take into account when we make our own economic choices. We will focus on two big areas— pollution and knowledge. In Reading Between the Lines at the end of the chapter, we look at the effects of a carbon tax designed to lower carbon emissions and address global warming. Externalities 14 315 Explain how externalities arise Explain why negative externalities lead to inefficient over- production and how property rights, emission charges, marketable permits, and taxes can be used to achieve a more efficient outcome Explain why positive externalities lead to inefficient under- production and how public provision, subsidies, vouchers, and patents can increase economic efficiency After studying this chapter, you will be able to: PART FIVE Market Failure and Government
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Externalities in Our Lives An externality is a cost or a benefit that arises from production and falls on someone other than the pro- ducer, or a cost or benefit that arises from consumption and falls on someone other than the consumer. We call an externality that imposes a cost a negative externality ; and we call an externality that provides a benefit a positive externality . We identify externalities as four types: Negative production externalities Negative consumption externalities Positive production externalities Positive consumption externalities Negative Production Externalities Congestion, pollution, and carbon emission are the sources of the most costly and widespread negative production externalities. Congestion The Lincoln Tunnel, which connects New Jersey to Manhattan under the Hudson River, is 1.5 miles long. Yet it can take 2 hours to get through the tunnel in the worst traffic. The costs of congestion are time costs and fuel costs. Drivers and their passengers spend extra hours sitting in stalled traffic, burning additional fuel. Each rush-hour user of the Lincoln Tunnel imposes a cost on the other users. This cost is a negative production externality.
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