Econ Modules 7.1, 7.2, & 7.3
steps for analyzing externalities
1) graph MPB and MPC to create a demand and supply graph that only reflects buyers and sellers 2) asses externalities 3) find MSC or MSB and graph above demand or supply/ find new socially optimal output equilibrium point where new intersection is
Which of the following illustrates a positive externality?
The value of Maria's house rises when the city builds a park nearby, enhancing her view.
If the social benefit of consuming a good or a service exceeds the private benefit
a positive externality exists.
An externality is defined as:
a side-effect of an activity that affects bystanders whose interests are not taken into account.
Marginal external costs of pollution are the
additional negative effects imposed on others due to one more unit of pollution.
positive externalities
any action whose side effect benefits bystanders/ deals with demand and benefit/ leads to underproduction
negative externalities
any action whose side effect harms bystanders/ deals with supply and cost/ leads to over production
external benefits
benefits positive externalities create for bystanders
irrationality can cause market failure since
buyers and sellers do not always follow rational rules so productivity is then inefficient
externalizes cause market failure whenever
choices buyers and sellers males have side effects on others/ businesses produce more than efficient quantity when products have a negative side effect (pollution)
marginal private costs and benefits represent the
classic supply demand and supply curve that only takes in account buyer and sellers and not society
marginal external costs
costs imposed on bystanders from one extra unit
marginal private costs
costs paid for by producer
producing under or over the efficient quantity can cause
deadweight loss
quantity determines
deadweight loss and economic surplus
deadweight loss =
economic surplus at efficient quantity - actual economic surplus
When the forces of supply and demand lead to an inefficient outcome
economists call this a market failure.
only those that have impacts outside the market have
externalities
price change is not an
externality
marginal external benefit
extra external benefits enjoyed by bystander from one extra unit
gov failure can cause market failure when
gov regulations create distortion and push the market away from the efficient quantity
When government policies lead to outcomes that are worse than those that would occur in unregulated markets:
government failure occurs.
external costs
harm negative externalities impose on bystanders
negative externalities cause social output to be
higher than private output
private information can lead to market failure since
it can undermine trust leading people to buy or sell less than the efficient quantity
positive externalities cause social output to be
less than private output
marginal social benefit
marginal private benefit + marginal external benefit/ above demand curve
marginal social cost
marginal private cost + marginal external cost/ above supply curve
When externalities are present, the socially optimal outcome occurs where the _____ benefit equals the _____ cost.
marginal social
market power causes market failure when
markets do not meet the competitive deal of many sellers selling identical products/ it leads to under production since businesses with market power produce less than the efficient quantity
the forces of supply and demand yield best possible outcome for
only buyers and sellers
you can read marginal private costs or benefits directly from demand or supply curve but you need to take into account _____________ to find external costs and benefits
opportunity costs
socially optimal outcome
outcome most efficient for whole society taking into account buyers/ sellers/ bystanders
marginal social benefits are greater than marginal private benefits when we face a
positive externality
rational rule for society
produce more until marginal social benefit = marginal social cost
A price change
redistributes costs and benefits but does not generate new costs or benefits.
market forces only benefit private costs and benefits/ buyers or sellers not
society and external cost and benefit
Irrational decision making in markets results in:
some supply decisions not matching marginal costs, and some demand decisions not reflecting marginal benefits.
externalities lead to market failure since they produce
suboptimal/ ieffcient outcomes
market failure occurs when
the forces of supply and demand lead to an inefficient outcome
A positive externality causes
the marginal social benefit to exceed the marginal private cost of the last unit produced.
Externalities tend to occur because decision makers consider _____ and do NOT consider _____.
their own costs and benefits; the effects of their actions on others
When the lawn care services market is characterized by positive externalities:
too few lawn care services are produced.
marginal private benefits
value received by consumer
price determines
wether or not the economic surplus is consumer or producer