econ resource lecture 2

econ resource lecture 2 - Econ Resource Lecture#2...

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Econ Resource Lecture #2 1/5/12 Externalities o Definition: An externality occurs when the actions of one person/institution make another worse or better off without experiencing the full costs or benefits of doing so. o Can be positive or negative o Must distinguish between private MC or MB and social MC or MB because private actions are no longer reflecting all productions or consumption activities When there are no externalities from consumption, then SMC=PMC and SMB=PMB SMC not equaling PMC or SMB not equaling PMB implies “market failure” Negative Production Externality o Occurs when the production of a good or service directly reduces the welfare of others and they are not compensated adequately o Examples: logging old-growth forest, agricultural run-off o Non-examples: fall in market share or price o Firm would prefer to ignore external social costs o Economists find middle ground by taking into account both sides Positive Externalities o
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