LS 15 - CHAPTER 15 Externalities Externalities in Our Lives...

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1 Externalities CHAPTER 15 Externalities in Our Lives An externality is a cost or benefit that arises from production and falls on someone other than the producer, or a cost or benefit that arises from consumption and falls on someone other than the consumer. A negative externality imposes a cost and a positive externality creates a benefit. A production externality is associated with the process of supplying a good, while a consumption externality is associated with the process of consuming it. Externalities in Our Lives The four types of externality are ± Negative production externalities ± Positive production externalities ± Negative consumption externalities ± Positive consumption externalities
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2 Externalities in Our Lives Negative Production Externalities Negative production externalities are common. Some examples are noise from aircraft and trucks, polluted rivers and lakes, the destruction of animal habitat, and air pollution in major cities from auto exhaust. Externalities in Our Lives Positive Production Externalities Positive production externalities are less common that negative externalities. Two examples arise in honey and fruit production. By locating honeybees next to a fruit orchard, fruit production gets an external benefit from the bees, which pollinate the fruit orchards and boost fruit output; and honey production gets an external benefit from the orchards. Externalities in Our Lives Negative Consumption Externalities Negative consumption externalities are a common part of everyday life. Smoking in a confined space poses a health risk to others; noisy parties or loud car stereos disturb others.
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3 Externalities in Our Lives Positive Consumption Externalities Positive consumption externalities are also common. When you get a flue vaccination, everyone you come into contact with benefits. When the owner of an historic building restores it, everyone who sees the building gets pleasure. Negative Externalities: Pollution Private Costs and Social Costs A private cost of production is a cost that is borne by the producer, and marginal private cost ( MC ) is the private cost of producing one more unit of a good or service. An external cost of production is a cost that is not borne by the producer but is borne by others. Marginal external cost is the cost of producing one more unit of a good or service that falls on people other than the producer. Negative Externalities: Pollution Marginal social cost is the marginal cost incurred by the entire society—by the producer and by everyone else on whom the cost falls—and is the sum of marginal private cost and marginal external cost. That is, MSC = MC + Marginal external cost. We express costs in dollars but must remember that the dollars represent the value of a forgone opportunity.
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This note was uploaded on 11/23/2011 for the course ECON 202 taught by Professor Brightwell during the Fall '08 term at Texas A&M.

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LS 15 - CHAPTER 15 Externalities Externalities in Our Lives...

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