Externalities Chapter 10 Copyright C 2001 by Harcourt, Inc All rights reserved. Requests for permission to make copies of any part of t work should be mailed to Permissions Department, Harcourt College Publishers 277. Sea Harbor Drive. Orlando Florida 32887-6777 2001 by Harco
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Externalities Chapter 10 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777
Market Efficiency - Market Failures Recall that: Adam smith’s“ invisible hand of the marketplace leads self- interested buyers and sellers in a market to maximize the total benefit that society can derive from a market But market failures can still happen H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Market Efficiency - Market Failures Recall that: Adam Smith’s “invisible hand” of the marketplace leads selfinterested buyers and sellers in a market to maximize the total benefit that society can derive from a market. But market failures can still happen
Market Failures: Externalities e When a market outcome affects parties other than the buyers and sellers in the market side-effects are created called externalities e Externalities cause markets to be inefficient and thus fail to maximize total surplus H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Market Failures: Externalities uWhen a market outcome affects parties other than the buyers and sellers in the market, side-effects are created called externalities. uExternalities cause markets to be inefficient, and thus fail to maximize total surplus
An externality arises when a person engages in an activity that influences the well being of a bystander and yet neither pays nor receives any compensation for that effect H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. An externality arises... . . . when a person engages in an activity that influences the well- being of a bystander and yet neither pays nor receives any compensation for that effect
Market Failures: Externalities o When the impact on the bystander is adverse, the externality is called a negative externality o When the impact on the bystander is beneficial, the externality is called a positive externality H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Market Failures: Externalities uWhen the impact on the bystander is adverse, the externality is called a negative externality. uWhen the impact on the bystander is beneficial, the externality is called a positive externality
Examples of Negative Externalities ◆ Automobile exhaust ◆ Cigarette smoking Barking dogs (loud pets) oLoud stereos in an apartment building 可可可可 Harcourt, Inc. items and derived items copyright o 2001 by Harc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. uAutomobile exhaust uCigarette smoking uBarking dogs (loud pets) uLoud stereos in an apartment building Examples of Negative Externalities
Examples of Positive Externalities ◆ Immunizations o Restored historic buildings o Research into new technologies Harcourt, Inc. items and derived items copyright O 2001 by Harcourt, Inc. tE
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. uImmunizations uRestored historic buildings uResearch into new technologies Examples of Positive Externalities
The arket for Aluminum Price of Aluminum Supply (private cost) Equilibrium Demand (private value 0 MARKET Quantity of H arc Inc items and derived items copyright C 2001 by Harcourt, Inc Aluminun
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Market for Aluminum... Quantity of Aluminum 0 Price of Aluminum QMARKET Demand (private value) Supply (private cost) Equilibrium
The market for Aluminum and Welfare economics The quantity produced and consumed in the market equilibrium is efficient in the sense that it maximizes the sum of producer and consumer surplus. H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Market for Aluminum and Welfare Economics The quantity produced and consumed in the market equilibrium is efficient in the sense that it maximizes the sum of producer and consumer surplus
The market for Aluminum and Welfare economics If the aluminum factories emit pollution(a negative externality), then the cost to society of producing aluminum is larger than the cost to aluminum producers. H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Market for Aluminum and Welfare Economics If the aluminum factories emit pollution (a negative externality), then the cost to society of producing aluminum is larger than the cost to aluminum producers