17 Externalities

Themarketisthennotproducingattheequilibriumanymoreas

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Unformatted text preview: tion of a good or service to society. 9 Positive Externality’s effect on the Competitive Equilibrium Price Supply = Marginal Cost Psb* P* Demand = Marginal Benefit Q* ► ► ► Qsb* Marginal Social Benefit = Marginal Benefit + Marginal External Benefit Quantity When there exists an externality, the marginal benefit/demand curve is shifted to reflect the benefit of producing to everyone. The market is then not producing at the equilibrium anymore as the equilibrium is now Qsb*, Psb*. Producing there maximizes surplus. Producing at Q*, P* instead of Qsb*, Psb* causes a DWL. Because it does not take into account total social benefit. 10 There exists under production so total surplus is subtracted from. How to solve for an externality: “Solving” for an externality is how we get the market to produce at equilibrium. There exists many solutions, we will examine 3 of them. Private Solution: have the effected parties work out their problems between them selves. Coase Theorem: if private parties can bargain without cost over the allocation of resources they can solve the problem of externality on their own. ► ► 1. ► Requirements for the Coase Theorem to work: 1. 2. ► Property rights are defined. Small number of people negotiating. Examples: Sprinkler and laundry, loud party and sleepi...
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