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Unformatted text preview: Microeconomics Chapter 10 Externalities Introduction Externality arises when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect If the impact on the bystander is adverse, it is called a negative externality If it is beneficial, it is called a positive externality 10-1b Negative Externalities 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 affected adversely by the pollution. The planner would choose the level of aluminum production at which the demand curve crosses the social-cost curve This intersection determines the optimal amount of aluminum from the standpoint of society as a whole...
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