externalities07 - Externalities An example of market...

Externalities
An example of market failure

Reason for GRCC no vote
Regarding the Grand Rapids Community College (GRCC) millage increase
and why I voted against it.
When I went to college I worked full-time and took a full-time class load. I
dealt with tuition hikes, the price of books and juggling my school and work
schedules. It took me over five years after graduation to pay off my student
loans. College is not a free ride, nor is it a guaranteed right. I do not
understand why people think it is everyone but the student's responsibility to
pay for college. It is certainly not my responsibility to subsidize another
person's higher education.
GRCC is a business that provides a service. Like any other business, it must
charge what it needs to provide the service. I'm not expected to subsidize a
student's car. Why I should I subsidize that student's college?

•
One of the Ten Principles of economics is
that: markets are usually a good way to
organize economic activity
•
We saw in Chapter 7 that in the absence
of market failures, the competitive market
outcome is efficient (maximizes Total
Surplus)
Introduction

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One type of market failure are externalities : the
uncompensated impact of one person’s actions
on the well-being of a bystander
–
Negative externality (“external cost”) :
the effect on bystanders is adverse
–
Positive externality (“external benefit”) :
the effect on bystanders is beneficial
Externalities

Alternative Definition
•
Positive Externality: A Benefit that goes
un-priced.
•
Negative Externality: A Cost that goes
un-priced.

Self-interested individuals respond to incentives. In a
market economy, Prices are incentives.
When the market is working efficiently, prices reflect the full
(“social”) costs and benefits of individuals’ actions.
But if some of the costs or benefits of actions are not
reflected in price, then the decisions are not optimal from a
social standpoint.
This happens when property rights are not well defined

Property right: the right of the owner to use the property as
s/he see fit and the right to sell it.
Property rights provide incentives to maintain resources
and produce goods and services because well-defined
property rights means owners reap the benefits (and pay
the costs) of their choices.
From the introductory lecture:

A Negative Externality: Pollution
Suppose a paper plant was located next to
your property. Paper production creates
dioxin (cancer-causing) as a by-product.
Can the plant dump its toxic waste on your
property? Why not?

What’s happening here?
How is this possible?
The damage to the environment is
a real economic cost, but decision
maker doesn’t face it.
The private costs diverge (are less than) the
social (full) costs. The market over-produces .

Other Examples
•
Health risks of second-hand smoke
•
Drunk driving
•
Noise pollution from construction
•
Late night stereo blasting in the dorms
•
Neighbor’s barking dog
.