Chapter 10 -- Carlos Pitta

Chapter 10 -- Carlos Pitta - CHAPTER 10 EXTERNALITIES 1...

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Unformatted text preview: CHAPTER 10 EXTERNALITIES 1 Chapter 10 Externalities Instructor: Carlos Pitta CHAPTER 10 EXTERNALITIES 2 In this chapter, look for the answers to these questions: What is an externality? Why do externalities make market outcomes inefficient? How can people sometimes solve the problem of externalities on their own? Why do such private solutions not always work? What public policies aim to solve the problem of externalities? CHAPTER 10 EXTERNALITIES 3 Introduction Recall one of the Ten Principles from Chap. 1: Markets are usually a good way to organize economic activity. Lesson from Chapter 7: In the absence of market failures, the competitive market outcome is efficient, maximizes total surplus. CHAPTER 10 EXTERNALITIES 4 Introduction One type of market failure: externalities. Externality : the uncompensated impact of one persons actions on the well-being of a bystander Negative externality : the effect on bystanders is adverse Positive externality : the effect on bystanders is beneficial CHAPTER 10 EXTERNALITIES 5 Introduction Self-interested buyers and sellers neglect the external effects of their actions, so the market outcome is not efficient. Another principle from Chapter 1: Governments can sometimes improve market outcomes. CHAPTER 10 EXTERNALITIES 6 Pollution: A Negative Externality Example of negative externality: Air pollution from a factory. The firm does not bear the full cost of its production, and so will produce more than the socially efficient quantity. How govt may improve the market outcome: Impose a tax on the firm equal to the external cost of the pollution it generates CHAPTER 10 EXTERNALITIES 7 Other Examples of Negative Externalities the neighbors barking dog late-night stereo blasting from the dorm room next to yours noise pollution from construction projects talking on cell phone while driving makes the roads less safe for others health risk to others from second-hand smoke CHAPTER 10 EXTERNALITIES 8 Positive Externalities from Education A more educated population benefits society: lower crime rates : educated people have more opportunities, so less likely to rob and steal better government : educated people make better-informed voters People do not consider these external benefits when deciding how much education to purchase Result: market eqm quantity of education too low How govt may improve the market outcome: subsidize cost of education CHAPTER 10 EXTERNALITIES 9 Other Examples of Positive Externalities Being vaccinated against contagious diseases protects not only you, but people who visit the salad bar or produce section after you....
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This note was uploaded on 01/10/2011 for the course AEB 2514 taught by Professor Evandrummond during the Spring '09 term at University of Florida.

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Chapter 10 -- Carlos Pitta - CHAPTER 10 EXTERNALITIES 1...

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