Chapter Thirty-Three Externalities
Chapter Thirty-Three Externalities
Externalities An externality is a cost or a benefit imposed upon a consumer or a firm by actions taken by others.The cost or benefit is thus generated externally to the consumer or the firm. An externally imposed benefit is a positive externality. An externally imposed cost is a negative externality
Externalities An externality is a cost or a benefit imposed upon a consumer or a firm by actions taken by others. The cost or benefit is thus generated externally to the consumer or the firm. An externally imposed benefit is a positive externality. An externally imposed cost is a negative externality
Examples of Negative Externalities Air pollution. Water pollution. Loud parties next door. Traffic congestion. Second-hand cigarette smoke suffered by a non-smoker. Increased health insurance premia due to alcohol or tobacco consumption
Examples of Negative Externalities Air pollution. Water pollution. Loud parties next door. Traffic congestion. Second-hand cigarette smoke suffered by a non-smoker. Increased health insurance premia due to alcohol or tobacco consumption
Examples of Positive Externalities A well-maintained property next door that raises the market value of your own property. A pleasant cologne or scent worn by the person seated next to you. Improved driving habits that reduce accident risks. A scientific advance
Examples of Positive Externalities A well-maintained property next door that raises the market value of your own property. A pleasant cologne or scent worn by the person seated next to you. Improved driving habits that reduce accident risks. A scientific advance
Externalities and Efficiency The crucial feature of an externality is that it impacts a third party;that is, somebody who is not directly a participant in the activity which produces the external cost or benefit
Externalities and Efficiency The crucial feature of an externality is that it impacts a third party; that is, somebody who is not directly a participant in the activity which produces the external cost or benefit
Externalities and Efficiency Externalities cause Pareto inefficiency;typically -too much scarce resource is allocated to an activity which causes a negative externality -too little resource is allocated to an activity which causes a positive externality
Externalities and Efficiency Externalities cause Pareto inefficiency; typically – too much scarce resource is allocated to an activity which causes a negative externality – too little resource is allocated to an activity which causes a positive externality
Externalities and Property Rights An externality will be taken to be a purely public commodity. A commodity is purely public if -it is consumed by everyone (nonexcludability),and -everybody consumes the entire amount of the commodity (nonrivalry in consumption). E.g.a broadcast television program
Externalities and Property Rights An externality will be taken to be a purely public commodity. A commodity is purely public if – it is consumed by everyone (nonexcludability), and – everybody consumes the entire amount of the commodity (nonrivalry in consumption). E.g. a broadcast television program
Inefficiency Negative Externalities Consider an example of two agents, A and B,and two commodities, money and smoke. Both smoke and money are goods for Agent A. Money is a good and smoke is a bad for Agent B Smoke is a purely public commodity
Inefficiency & Negative Externalities Consider an example of two agents, A and B, and two commodities, money and smoke. Both smoke and money are goods for Agent A. Money is a good and smoke is a bad for Agent B. Smoke is a purely public commodity
Inefficiency Negative Externalities Agent A is endowed with $yA. Agent B is endowed with $yB. Smoke intensity is measured on a scale from 0 (no smoke)to 1 (maximum concentration)
Inefficiency & Negative Externalities Agent A is endowed with $yA. Agent B is endowed with $yB. Smoke intensity is measured on a scale from 0 (no smoke) to 1 (maximum concentration)
Inefficiency Negative Externalities Smoke Money and smoke are both goods for Agent A. ■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■ mA
Inefficiency & Negative Externalities OA 1 0 Smoke yA mA Money and smoke are both goods for Agent A