Chapter 10 Externalities

What does a typical graph look like for negative externalities?

Demand and Supply (private value), Supply 2 (social cost = private + external). Optimum equilibrium is smaller than the Market quantity.

which outcome will market produce at: Q market or Q efficient/optimal?

Q market.

Negative externality

adverse impact on someone

positive externality

beneficial impact

external cost

cost falling on people outside of the market

how does a positive externality move on a graph

demand goes down

corrective subsidy

equals external benefit from positive externalities

cap and trade

establish overall limit on pollution, sell permits to pollute the total overall/limit. companies with higher reduction costs can buy more permits

What costs does the market equilibrium (q market) show?

private costs

why might economists prefer taxes over regulations?

regulations requires all companies to adhere to a certain amount. taxes take care of the job more direct and efficiently

how does a negative externality shift on the graph

supply shifts up

corrective taxes

taxes enacted to deal with the effects of negative externalities. ideal corrective taxes equals the external cost from an activity with negative externalities - gives incentive (e.g. if you pollute more than a pack of cigarettes worth of smoke, you pay $50)

Externality

the uncompensated impact of one person's activity impacts the well being of another. Can be positive or negative

social cost

total cost to society of production. Includes private cost plus the cost to bystanders (external cost)