Lecture Principles of microeconomics - Chapter 10: Externalities. In this chapter you will: Learn the nature of an externality, see why externalities can make market outcomes inefficient, examine how people can sometimes solve the problem of externalities on their own,. | Externalities Chapter 10 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. Market Failures: Externalities When a market outcome affects parties other than the buyers and sellers in the market, side-effects are created called externalities. Externalities cause markets to be inefficient, and thus fail to maximize total surplus. An externality arises. . . . when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect. Market Failures: Externalities When the impact on the bystander is adverse, the externality is called a negative externality. When the impact on the bystander is beneficial, the externality is called a positive externality. Automobile exhaust Cigarette smoking Barking dogs (loud pets) Loud | Externalities Chapter 10 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. Market Failures: Externalities When a market outcome affects parties other than the buyers and sellers in the market, side-effects are created called externalities. Externalities cause markets to be inefficient, and thus fail to maximize total surplus. An externality arises. . . . when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect. Market Failures: Externalities When the impact on the bystander is adverse, the externality is called a negative externality. When the impact on the bystander is beneficial, the externality is called a positive externality. Automobile exhaust Cigarette smoking Barking dogs (loud pets) Loud stereos in an apartment building Examples of Negative Externalities Immunizations Restored historic buildings Research into new technologies Examples of Positive Externalities The Market for Aluminum. Quantity of Aluminum 0 Price of Aluminum QMARKET Demand (private value) Supply (private cost) Equilibrium QMARKET Pollution and the Social Optimum. Quantity of Aluminum 0 Price of Aluminum Demand (private value) Supply (private cost) Social cost Qoptimum Cost of pollution Equilibrium Optimum Negative Externalities in Production The intersection of the demand curve and the social-cost curve determines the optimal output level. The socially optimal output level is less than the market equilibrium quantity. Positive Externalities in Production When an externality benefits the bystanders, a positive externality exists. The social costs of production are less than the private cost to producers and consumers. Positive Externalities in Production. Quantity of Robots 0 Price of Robot .
