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