Externalities
Part 1
Market FailureOne type of market failure:
Externality, the uncompensated impact of one person’s actions on the well-being of a bystander.
Self-interested buyers and sellers neglect the external costs or benefits of their actions on society, so the market outcome is not efficient for everyone.
Externalities can be negative or positive, depending on whether impact on bystander is adverse or beneficial. (good or bad)
Textbook definition: - is a cost or a benefit that arises from:Production that falls on someone other
than the producer.Consumption that falls on someone other
than the consumer.
Shorter definition: - the uncompensated 无补偿的 impact of
one person’s actions on the well-being of a bystander or third party.
Easier definition: - Stuff that affects other people.
Externalities
1.) Externality Types2.) The Graphs3.) Solutions
Market Failure - Externalities
Negative Externalities - Unintended costs.
- A production or consumption activity that creates an external cost.
Negative consumption
Negative production
1.) Externality Types
Negative consumption
Negative production
1.) Externality Types
Negative consumption
Negative production
1.) Externality Types
Negative consumption
Negative production
1.) Externality Types
Negative consumption
Negative production
1.) Externality Types
Demerit Goods - Goods with negative externalities and considered socially undesirable.
1.) Externality Types
Positive Externalities
Positive consumption
Positive production
1.) Externality Types
- Unintended benefits.- A production or
consumption activity that creates an external benefit.
Positive consumption Positive production 1.) Externality Types
疫苗
Positive consumption Positive production 1.) Externality Types
Positive consumption Positive production 1.) Externality Types
Positive consumption Positive production 1.) Externality Types
Positive consumption Positive production 1.) Externality Types
Merit Goods
1.) Externality TypesGoods with positive
externalities of which more is desired then would typically be produced.
1.) Externality Types2.) The Graphs
Market Failure - Externalities
2.1) Negative2.2) Positive
3.) Solutions
Means an additional one, the measurement from one unit to the next. 最后的东西之一
Marginal Benefits VS. Marginal Costs 边际效益 针对 边际成本 (MB) (MC)
If MB > MC = It is worth doing 这是值得的If MB = MC = It may be worth doing “a wash” 收支平衡If MB < MC = Not worth doing 这是不值得的
Also called Cost/Benefit analysis
Marginal Thinking
– Training your brain to understand value训练你的大脑明白什么意思值
Marginal Benefit
Marginal Thinking
The value of one more unit of a good or service is its marginal benefit. can be measured as
the maximum price that people are willing to pay for another unit of the good or service.
Demand and Marginal Benefit
- Buyers distinguish 区别 between value and price.- Value is what the buyer gets.- Price is what the buyer pays.
If we looked at a larger market with many more buyers, each would be a step on this curve
It looks just like a demand curve doesn’t itThat’s because it is!
D = MB
P
Q
Demand = Marginal Benefit
Remember this?
Means an additional one, the measurement from one unit to the next. 最后的东西之一
Marginal Benefits VS. Marginal Costs 边际效益 针对 边际成本 (MB) (MC)
If MB > MC = It is worth doing 这是值得的If MB = MC = It may be worth doing “a wash” 收支平衡If MB < MC = Not worth doing 这是不值得的
Also called Cost/Benefit analysis
Marginal Thinking
Means an additional one, the measurement from one unit to the next. 最后的东西之一
Marginal Social Benefits VS. Marginal Social Costs 边际效益 针对 边际成本 (MB) (MC)
If MSB > MSC = It is worth doing 这是值得的If MSB = MSC = It may be worth doing “a wash” 收支平衡If MSB < MSC = Not worth doing 这是不值得的
Also called Cost/Benefit analysis
Marginal Thinking
( MPC ) Marginal Private Cost ( MC )
- The cost of producing an additional unit of a good or service that is borne by the producer of it.*Supply =MC = MPC
2.) The Graphs
P
QMB
P
MC = MPCMarginal Costs = Marginal Private Costs
EQ
MC - Typical market equilibrium that we have studied so far.
2.) The Graphs
( MPC ) Marginal Private Cost ( MC )
2.) The Graphs
( MEC ) Marginal External Cost
- The cost of producing an additional unit of a good or service that falls on people other than the producer.*** The more
produced the higher the costs.
P
QMB
P
MECMarginal External Costs
Negative Externalities
- At any given output the external costs to all are higher then the private costs
- The more that is produced the higher the costs become
EQ
External cost
MC
( MPC ) Marginal Private Cost ( MC )
2.) The Graphs
( MEC ) Marginal External Cost
( MSC ) Marginal Social Cost
+
=- The marginal
cost incurred by the entire society
P
QMB
MSCMarginal Social CostsMPC + MEC = MSC
The marginal cost incurred by the entire society – everyone – the people that produce it and all other third parties affected by it
External cost
MSC
MC
2.) The Graphs
P
QMB
P
EQ
External cost
MSC
MC
The MPC production point is not efficient from a societal view, too much is produced.
MB = MSC is the efficientproduction point
froma societal view.
EQ1
P1
2.) The Graphs
P
Q
P
Deadweight loss occurs for society at MPB.
The marginal cost incurred by the entire society – everyone – the people that produce it and all other third parties affected by itEQ
MSC
MC
MB=MPB
P1
EQ1
2.) The Graphs
0
1
2
3
4
5
0 10 20 30 Q (gallons)
P $
The market for gasoline
Another Example of a Negative Externality:
Supply (private cost)
External cost = value of the negative
impact on bystanders
= $1 per gallon(value of harm from smog, greenhouse gases)
Social cost = private + external cost
0
1
2
3
4
5
0 10 20 30 Q (gallons)
P $
The market for gasoline
D
S
The socially optimal quantity is 20 gallons.
At any Q < 20, value of additional gas is higher then social cost. At any Q > 20, social cost of the last gallon isgreater than its value to society.25
Demand
Private
cost
Social Cost
Another Example of a Negative Externality:
0
1
2
3
4
5
0 10 20 30 Q (gallons)
P $
The market for gasoline
D
S
The socially optimal quantity is 20 gallons.
At any Q < 20, value of additional gas is higher then social cost.
25
Demand And there is a deadweight loss
Private
cost
Social Cost
Another Example of a Negative Externality:
0
1
2
3
4
5
0 10 20 30 Q (gallons)
P $
The market for gasoline
D
S
The socially optimal quantity is 20 gallons.
At any Q > 20, social cost of the last gallon isgreater than its value to society.
25
Demand And there is a deadweight loss
Private
cost
Social Cost
Another Example of a Negative Externality:
1.) Externality Types2.) The Graphs
Market Failure - Externalities
2.1) Negative2.2) Positive
3.) Solutions
( MPB ) Marginal Private Benefits ( MB )
2.) The Graphs- The benefit of an
additional unit of a good or service that the consumer of that good or service receives.
*Demand = MB = MPB
P
QMB
P
MB = MPBMarginal Benefits = Marginal Private Benefits
- Typical market equilibrium that we have studied so far.
EQ
MC
2.) The Graphs
( MPB ) Marginal Private Benefits ( MB )
2.) The Graphs
- The benefit of an additional unit of a good or service that people other than the consumer of the good or service enjoy.
( MEB ) Marginal External Benefit
*** The more consumed the benefits diminish.
P
Q
P
MEBMarginal External Benefits
- At any given point the external benefits of society are greater then that of the individual
- As more is produced the benefits typically become smaller
EQ
External benefit
MC
MB
2.) The Graphs
( MPB ) Marginal Private Benefits ( MB )
2.) The Graphs
( MEB ) Marginal External Benefit
- The marginal benefit enjoyed by society.
( MSB ) Marginal Social Benefit
+
=
P
Q
P
MSBMarginal Social Benefits
- The cost of producing an additional unit of a good or service that falls on people other than the producer.EQ
External benefit
MC
MB
MSBMPB + MEB =
MSC
2.) The Graphs
P
Q
P
EQ
MCMSB
P1
EQ1
MB = MPB
The MPB production point is not efficient from a societal view, not enough is produced.
MC = MSB is the efficientproduction point
froma societal view.
2.) The Graphs
P
Q
P
EQ
MCMSB
P1
EQ1
MB = MPB
Deadweight loss occurs for society at MPB.
Not enough is produced from the view from society
2.) The Graphs
Negative Externality- Market quantity larger than socially desirable- Overproduction
Positive Externality- Market quantity smaller than socially desirable- Underproduction
Next:To remedy the problem: “internalize the externality” 内部化的外部性 tax goods with negative externalities subsidize goods with positive externalities Create government regulation and laws to prevent the problem
Effects of Externalities: Summary
So to Summarize….
Means an additional one, the measurement from one unit to the next. 最后的东西之一
Marginal Benefits VS. Marginal Costs 边际效益 针对 边际成本 (MB) (MC)
If MB > MC = It is worth doing 这是值得的If MB = MC = It may be worth doing “a wash” 收支平衡If MB < MC = Not worth doing 这是不值得的
Also called Cost/Benefit analysis
Marginal Thinking
Means an additional one, the measurement from one unit to the next. 最后的东西之一
Marginal Social Benefits VS. Marginal Social Costs 边际效益 针对 边际成本 (MB) (MC)
If MSB > MSC = It is worth doing 这是值得的If MSB = MSC = It may be worth doing “a wash” 收支平衡If MSB < MSC = Not worth doing 这是不值得的
Also called Cost/Benefit analysis
Marginal Thinking
P
QMB
P
EQ
External cost
MSC
MC
The MPC production point is not efficient from a societal view, too much is produced.
MB = MSC is the efficientproduction point
froma societal view.
EQ1
P1
2.) The Graphs
P
Q
P
Deadweight loss occurs for society at MPB.
The marginal cost incurred by the entire society – everyone – the people that produce it and all other third parties affected by itEQ
MSC
MC
MB=MPB
P1
EQ1
2.) The Graphs
P
Q
P
EQ
MCMSB
P1
EQ1
MB = MPB
The MPB production point is not efficient from a societal view, not enough is produced.
MC = MSB is the efficientproduction point
froma societal view.
2.) The Graphs
P
Q
P
EQ
MCMSB
P1
EQ1
MB = MPB
Deadweight loss occurs for society at MPB.
Not enough is produced from the view from society
2.) The Graphs
Goods with ExternalitiesDemerit Goods Goods with negative
externalities and considered socially undesirable.
Merit Goods Goods with positive externalities of which more is desired then would typically be produced.
The End
Thanks!