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8 Business Costs and Production -- Part 2
Economists use supply and demand analysis to compare the efficiency of the market with the social optimum.
The demand curve is the focus this time.
A person gets a flu shot.
The internal benefit is created when the vaccine is administered.
There is an external benefit.
Because the recipient won't get the flu, fewer people will catch the flu, which helps to protect those who don't get flu shots.
Positive externality to the rest of society can be provided by vaccines.
There is an incentive for people in high-risk groups to get a flu shot for the sake of their own health.
The market equilibrium only accounts for the internal benefits of individuals deciding whether to get vaccine.
School vaccination laws would require all children entering school to provide proof of vaccine against a variety of diseases.
Positive benefits for all members of society can be created by internalizing the externality of the requirement.
The market will be pushed toward the socially optimal number of vaccinations if more people get vaccine early in life.
In the United States, vaccination rates have been falling for years.
There are both individual and social benefits to the lower vaccination rate.
Measles can spread quickly when the vaccine rate is not 100%, as evidenced by the outbreak that spread to six U.S. states, Mexico, and Canada.
Eco nomic activity that helps third parties can be promoted by the government.
It can offer a price break to encourage people to get vaccinations.
Market inefficiencies increase the demand for vaccines, which raises the overall market price.
Governments give free or reduced cost vaccines to those most at risk from flu.
The social demand curve shows the benefits of getting the vaccine.
Consumers are encouraged to internalize the externality of the subsidy.
Markets don't handle externalities well.
Too much of a good can be produced by the market with a negative externality.
In the case of a positive externality, the market produces too little.
Deadweight loss is created by the market equilibrium.
The private market is not efficient when positive externalities are present.
The market equilibrium doesn't maximize the gains for society as a whole.
The demand curve shifts outward when positive externalities are present.
The deadweight loss that results from insufficient market demand is eliminated.
The key characteristics of positive and negative externalities are summarized in Table 7.2.
Not all externalities warrant cor rective measures.
Sometimes the size of the externality is not justified by the cost of increased regulations, charges, taxes, or subsidies that might achieve the social optimum.
The presence of negligible externalities does not mean that the government should intervene in the market.
The spread of disease is prevented by flu shots.
Motorists spend more time on the road and citizens spend less time on the road.
Historic buildings help with pollution.
Pennsylvania, Texas, West Virginia, and Wyoming are some of the states where energy companies have begun using the process known as frack to extract natural gas.
Water, chemicals, and sand are injected into rock formations.
Natural gas is trapped in the rocks and can be released through the process.
Much of the water and chemical mixture must be thrown away because it came to the surface.
Controversy has grown about the potential environmental effects of the process as it has expanded.
People who live near wells worry about the pollutants in the water mixture and their potential to ruin drinking water supplies.
The drilling of a well is noisy.
For a few weeks, drilling occurs 24 hours a day.
Anyone who lives close by is affected by this noise pollution.
The natural gas has to be moved away from the well.
Local roads can be damaged by additional truck traffic.
The areas where it is occurring have seen tremendous economic growth.
Many people have been employed because of the jobs that have been created.
As temporary employees move from one area to another, local hotels and restaurants have seen an increase in business.
As permanent employees take over the operation of a well, housing prices go up, which benefits local homeowners.
The government doesn't need to force everyone to shower.
People with bad body odor have every reason to shower, use extra strength deodorant, or use cologne to mask the smell on their own.
They will be ostracized if they don't avail themselves of these options.
It is best to leave alone because government regulations to completely eliminate the externality would be quite burdensome.
There is a divide between the way markets operate and the social optimum.
Resources can over resources if property rights are not clearly defined.
Manufacturing firms emit pollutants into the air because no one owns it.
We need to examine the role of property rights in market efficiency to understand why firms sometimes overlook their actions.
When we compare situations in which people have property rights, the difference is obvious.
Private owners have an incentive to keep their property in good repair because they bear the costs of fixing what they own when it breaks or no longer works properly.
If you own a personal computer, you should treat it with care and deal with any problems as soon as possible.
If you find that a public computer terminal in a campus lab is malfunctioning, you will most likely ignore the problem and look for another computer that is working.
Property rights matter because of the difference between solving the problem and ignoring it.
This right creates an incen that allows for the use, and tives to maintain, protect, and conserve property and to trade with others.
There is an incentive for car owners to maintain their vehicles.
The vehicle is safe and reliable because of regular maintenance and repairs.
There is an incentive for owners to protect their vehicles.
They use alarm systems, locking doors, and parking in well lit areas to protect their property.
Car owners can extend the usable life of their cars by limiting the number of miles they drive each year.
Car owners have an incentive to trade with each other.
You can do what you want with the car.
If you decline to sell, you will have to give up $5,000 to keep the item you value at $3,000.
The owner of private property has an incentive to trade for something better in the market.
Incentives to maintain, protect, and conserve property help to ensure that owners keep their private property in good shape.
The fourth incentive, to trade with others, helps to ensure that private property is held by the person with the greatest willingness to pay.
Ronald Coase argued in 1960 that private property rights can close the gap between internal and social costs.
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