Chapter%2010.B

Chapter%2010.B - CHAPTER 10 CHAPTER EXTERNALITIES...

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CHAPTER 10 CHAPTER 10 EXTERNALITIES EXTERNALITIES
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Main issues 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?
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Recall: Markets are usually a good way to organize economic activity. In the absence of market failures, the competitive market outcome is efficient, maximizes total surplus.
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One type of market failure: externalities. Externality : the uncompensated impact of one person’s actions on the well-being of a bystander. Negative externality : the effect on bystanders is adverse Positive externality : the effect on bystanders is beneficial Self-interested buyers and sellers neglect the external effects of their actions, so the market outcome is not efficient.
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Pollution: An example of a negative externality When a firm emits pollutants into the environment it does not bear full cost of its production, and so will produce more than the socially efficient quantity. Governments can improve the market outcome by imposing a tax on the firm equal to the external cost of the pollution it generates
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Positive Externalities from Education Education is associated with positive externalities: lower crime rates better government lower unemployment better international competitiveness
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Chapter%2010.B - CHAPTER 10 CHAPTER EXTERNALITIES...

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