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Unformatted text preview: Chapter 18.a. Externalities and Efficiency Sometimes when producing or consuming a good, harmful or beneficial side effects occur that can affect people beyond those directly involved in the market exchanges. If the side effects are positive they are called external benefits and if they are negative they are called external costs . Immunizations are an example of an external benefit and pollution, congestion, noise, and theft are examples of external costs. Externalities tend to cause an inefficient allocation of resources because these extra costs and benefits must be taken into account. Another way to define an externality is when one person’s actions affect another’s well-being and no payment is made . External Costs Suppose a steel mill is polluting the surrounding environment as a byproduct of producing steel. The smoke produces $5 in damages for every ton of steel produced. The MC private curve represents the marginal costs for the steel mill, but the damage from pollution must also...
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This note was uploaded on 05/05/2010 for the course ECON 303 taught by Professor Cheng during the Spring '07 term at USC.
- Spring '07