Unformatted text preview: Externalities 1 By the end of this Section you should be able to:
► Define and describe an externality (both + and ) and its effects of social welfare.
► Evaluate 3 of the possible solutions for an externality: Private Solution
Tradable Permit Market 2 Externalities
► An externality is an uncompensated impact of one person’s actions on the wellbeing of a bystander.
► Externalitites can be + (a benefit for the bystander) or – (a cost for the bystander).
► Examples: Pollution from manufacturing
Exhaust from automobiles
Knowledge to everyone from scientific discoveries
Sprinklers in your yard hitting the clean laundry set out to dry by your next door neighbor
3 Recall a Competitive Equilibrium
Supply = Marginal Cost Price P*
Demand = Marginal Benefit
Q* Quantity ► If the market is producing at Q*,P* then social welfare is maximized. ► This assumes there is no externality.
4 Two Types of Externalities
► Type 1: Negative Externality A negative externality exists when production or consumption activity creates an external cost. 5 What happens when there is a Negative Externality
► When there is a negative externality, there exists a marginal external cost. Marginal External Cost...
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