Principles of Economics- Mankiw (5th) 200

Principles of Economics- Mankiw (5th) 200 - 208 PA R T F O...

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208 PART FOUR THE ECONOMICS OF THE PUBLIC SECTOR market equilibrium, shown as Q MARKET in Figure 10-1, is efficient in the sense that it maximizes the sum of producer and consumer surplus. That is, the market allocates resources in a way that maximizes the total value to the consumers who buy and use aluminum minus the total costs to the producers who make and sell aluminum. NEGATIVE EXTERNALITIES IN PRODUCTION Now let’s suppose that aluminum factories emit pollution: For each unit of alu- minum produced, a certain amount of smoke enters the atmosphere. Because this smoke creates a health risk for those who breathe the air, it is a negative external- ity. How does this externality affect the efficiency of the market outcome? Because of the externality, the cost to society of producing aluminum is larger than the cost to the aluminum producers. For each unit of aluminum produced, the social cost includes the private costs of the aluminum producers plus the costs to those bystanders adversely affected by the pollution. Figure 10-2 shows the so-
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