1 / 11

Externalities

Externalities. Chapter 10. EXTERNALITIES. An externality is the uncompensated impact of one person’s actions on another person Both positive & negative externalities exist Externalities cause markets to be inefficient That is, markets do not maximize total surplus.

jonco
Télécharger la présentation

Externalities

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Externalities Chapter 10

  2. EXTERNALITIES • An externalityis the uncompensated impact of one person’s actions on another person • Both positive & negative externalities exist • Externalities cause markets to be inefficient • That is, markets do not maximize total surplus

  3. Negative Externalities • Automobile exhaust • Cigarette smoking • Barking dogs (loud pets) • Loud stereos in an apartment building • Noisy Students • Neighbor’s poorly maintained property

  4. Positive Externalties • Immunizations • Restored historic buildings • Research into new technologies • Neighbor’s well maintained property

  5. MC = MB MARKET INEFFICIENCY • Negative externalities lead markets to overproduce • Positive externalities lead markets to under-produce

  6. Supply = MCP External social Cost (private cost) Optimum Spillover Cost Equilibrium MC = MB Demand = MBP (private value) QOPTIMUM QMARKET Negative Externality: Pollution MCT= MCP + MCS Price of Aluminum Quantity of 0 Aluminum

  7. External social benefit Supply = MCP (private cost) Optimum Equilibrium Spillover Benefits Demand = MBP (private value) QOPTIMUM QMARKET Positive Externality: Neighbor paints House Price MBT = MBP + MBS Quantity 0

  8. Solutions to Externalities • Internalizing an externality involves altering incentives • Government Methods • Taxes (corrective taxes) • Subsidies • Patents • Laws (immunization laws, pollution laws) • Free market solution: • Trading pollution credits

  9. Taxing Negative Externalities Impose Tax = spillover cost Shifts Supply Curve left Reach social optimal output Total Cost = Total Benefit Total Cost = MCP + MCS

  10. Subsidizing Positive Externalities Impose Subsidy=spillover benefit Shifts demand curve right Reach social optimal output Total Cost = Total Benefit

  11. Worksheet • Externalities

More Related