Externalities

Internalizing the externality:

(a tax can internalize the externality) altering incentives so that people take account of the external effects of their actions.

Public Policies Toward Externalities

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Command and control policies: regulations

Dangerous chemicals Regulation of Pollution: EPA (develops and enforces regulations) Policies: either a maximum limit or tech to reduce emissions.

Positive Externalities

Education - better worker, higher wages...positive externalities...more informed voters; lower crime rates; uses of tech.

Externalities

Government action is sometimes necessary to improve upon market outcomes; government can improve upon this.

Externalities and Market Inefficiency

Negative Externalities: (Aluminum plants emit smoke which is a health risk.) For each unit of aluminum produced, the social cost includes the private costs of the aluminum producers plus the costs to those bystanders affected adversely by the pollution.

Summary:

Negative externalities lead markets to produce a larger quantity than is socially desirable. Positive externalities lead markets to produce a smaller quantity than is socially desirable. To remedy the problem, the government can internalize the externality by taxing goods that have negative externalities and subsidize goods that have positive externalities.

Positive Externality: Technology Spillover

Positive impact to other firms. Tech Progress: key to rising living standards

Government

Tax breaks; subsidies Patents also encourage Research and Development

Corrective Tax

a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality.

Negative externality

adverse impact

Positive externality

beneficial impact

The Social Cost Curve

is above the supply curve because it takes into account the external costs imposed on society by aluminum producers. (The difference between the two curves: the cost of pollution emitted)

Social Value

is greater than than the public good. The social value curve lies above the demand curve. Thus the socially optimal quantity is greater than the quantity determined by the private market.

Command and control policies

regulate behavior directly market based incentives allow the market to solve their own problem.

Externality

the uncompensated impact of one person's actions on the well-being of a bystander.

A social optimum...

to get there requires a subsidy. Education is subsidized.