#31.1 -- Externalities (8.16)

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Information about #31.1 -- Externalities (8.16)
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Published on March 21, 2014

Author: davidlevan

Source: authorstream.com

PowerPoint Presentation: Market Failure: A situation where the market does not provide the ideal or optimal amount of a particular good. Video #31.1 – Externalities Market Failure #1: Externalities: Market Failure #1: Externalities Chapter Learning Outcomes: Define economic market failure.   Externalities Define and describe both negative and positive externalities and how they contribute to market failure. Calculate the marginal costs and benefits associated with externalities. Graphically illustrate an externality and the market failure it causes. Describe different strategies for internalizing externalities. Market Failure #1: Externalities: Market Failure #1: Externalities What is an externality? A side effect of an action that affects the well-being of third parties, either positively or negatively. Why is an externality a market failure? Externalities disrupt the market output from the socially optimal output. Marginal Social Costs (MSC) and Benefits (MSB): Marginal Social Costs ( MSC ) and Benefits (MSB) Marginal Social Costs (MSC) Sum of marginal private costs (MPC) and marginal external costs (MEC). MSC = MPC + MEC Marginal Social Benefits (MSB) Sum of marginal private benefits (MPB) and marginal external benefits (MEB). MSB = MPB + MEB Socially Optimal Amount: Socially Optimal Amount An amount that takes into account and adjusts for all benefits (external and private) and all costs (external and private). The socially optimal amount, the efficient amount, is the amount at which MSB = MSC. With externalities, the market does not obtain the socially optimal amount. Negative Externalities: Negative Externalities A negative externality exists when actions cause a cost, an adverse side effect, felt by others. The market overproduces the good connected with the negative externality. Socially optimal output is less than market output. Negative Externalities exist when: MSC > MPC Positive Externalities: Positive Externalities A positive externality exists when an actions cause a benefit, a beneficial side effect, to be felt by others. The market under produces the good connected with the positive externality. Socially optimal output is greater than market output. Positive Externalities exist when: MSB > MPB The Negative Externality Case: The Negative Externality Case MSC > MPC Market output is greater than the socially optimal output. Market fails because it overproduces the good . Effects of a negative externality: Effects of a negative externality Q 2 is the socially optimal output. Q 1 is the market output. Difference between two shaded areas represents the net social cost to society. The Positive Externality Case: The Positive Externality Case MSB > MPB. Market output is less than the socially optimal output. Market fails because it under-produces the good . Internalizing Externalities: Internalizing Externalities An externality is internalized if the persons who generated the externality incorporate the external cost or benefit into their own internal cost-benefit calculations. Adjusting for Market Externalities: Adjusting for Market Externalities Ways to internalize positive and negative externalities: Persuasion: Persuade producers or consumers to internalize the cost. Assignment of property rights: Private ownership encourages self-interested behavior. Voluntary agreements: Private solutions create agreements to adjust the externality. Levy taxes or provide subsidies: Government can tax negative externalities Or subsidize positive externalities. Government regulations Market Failure #1: Externalities: Market Failure #1: Externalities Chapter Learning Outcomes: Define economic market failure.   Externalities Define and describe both negative and positive externalities and how they contribute to market failure. Calculate the marginal costs and benefits associated with externalities. Graphically illustrate an externality and the market failure it causes. Describe different strategies for internalizing externalities.

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