1B03_CH_10 - Chapter 10 Externalities Copyright 2006...

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Chapter 10 Externalities
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Externalities Sometimes there are benefits and costs that arise  in the market that go uncompensated. These are called  externalities . positive  externality is a benefit that is enjoyed  by society, but society doesn’t pay to receive it. Example: I enjoy the shade from my neigbour’s  tree, and it doesn’t cost me anything.
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. A   negative  externality is a cost suffered by  society, and the instigator isn’t made to pay for  the damage they do. Example: my neighbour’s nasty dog barks all  night and keeps me awake, and my neighbour  doesn’t compensate me for my lost sleep.
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd.   So, externalities are created when a market outcome affects  individuals other than buyers and sellers in  that market. cause welfare in a market to depend on more  than just the value to the buyers and cost to  the sellers. can lead to inefficient markets if buyers and  sellers do not take them into account when  deciding how much to consume and produce.
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Negative externalities lead markets to produce  more than is socially desirable. Positive externalities lead markets to produce  less than is socially desirable. Consider the market for steel:
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Negative Externalities Equilibrium Supply (Private Cost) Demand (Private Value) Q market
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. If steel factories emit pollution, the cost 
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This note was uploaded on 03/11/2011 for the course ECON 1B03 taught by Professor Hannahholmes during the Spring '08 term at McMaster University.

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1B03_CH_10 - Chapter 10 Externalities Copyright 2006...

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