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The Principles of Economics
The Principles of Economics
10 Externalities
-externality: the uncompensated impact of one person's actions on the well-being of a bystander.
-A positive externality is beneficial, while a negative externality poses adverse effects.
-The market equilibrium is not efficient when there are externalities.
-Society's interest in market outcome involves buyers, sellers, and bystanders when externalities are involved.
-A negative externality can be considered the exhaust from automobiles.
10-1 Externalities and Market Inefficiency
10-1a Welfare Economics: A Recap
-Supply and demand curves help gain information on costs and benefits.
-The supply curve reflects the cost of producing steel.
10-1b Negative Externalities
-The social cost equals the private costs of the steel producers plus the costs to those bystanders harmed by the pollution.
-internalizing the externality: altering incentives so that people take into account the external effects of their actions.
-Social cost curves and supply curves differ in the fact that they emit different amounts of pollution.
10-1c Positive Externalities
-Social value is more advantageous than private and it's above the demand curve.
-Private school is more beneficial but public schools has positive externalities.
-Industrial policies are often government interventions that hope to promote technology-enhancing industries.
10-2 Public Policies toward Externalities
10-2a Command-and-Control Policies: Regulation
-The Environmental Protection Agency is responsible for developing and enforcing regulations aimed at protecting the environment in the United States.
-The government has the power to require or forbid certain behaviors.
-The EPA can determine how many levels of pollution a factory can emit.
10-2b Market-Based Policy 1: Corrective Taxes and Subsidies
-corrective taxes: a tax designed to induce private decision makers to take into account the social costs that arise from a negative externality.
-Corrective taxes are often called pigovian taxes after Arthur Pigou, an economist who used these forms of taxes. They give an economic incentive.-Economists favor taxes over regulation.
10-2c Market-Based Policy 2: Tradable Pollution Permits
-Social welfare becomes enhanced by the allowing permits to be sold.
-Polluting firms pay the government and it costs the government more by internalizing the externality.
-Bipartisan action is not on the White House or Congress' agenda.
-Pollution permits are cost-effective ways at keeping the environment clean.
10-2d Objections to the Economic Analysis of Pollution
-Some may argue that the environment should be protected at all costs but clean air and water quality has high opportunity cost of technology and high standard of living.
-The Law of Demand lowers the price of environmental protection and increases the demand for a clean environment.
10-3 Private Solutions to Externalities
10-3a The Types of Private Solutions
-Moral injunctions tell us to think about how our actions will affect others (internalize externalities).
-Charities like non-for-profit organizations get funds through private donations.
-The government encourages private solutions by deducting income taxes from charitable donations.
10-3b The Coase Theorem
-coase theorem: the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own.
10-3c Why Private Solutions Do Not Always Work
-Bargaining doesn't always work when trying to use private solutions because the parties have trouble agreeing and reaching one another.
-transaction costs: the costs that parties incur during the process of agreeing to and following through on a bargain.
Ex. The transaction costs for a translator or lawyer or attorney.
10-4 Conclusion
-Outcomes are efficient when buyers and sellers in markets are the only interested parties.
-When external effects are present, third parties must be taken into account when evaluating a market outcome.