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Econ 1B03 Chapter 10 Part 1.docx

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Hannah Holmes

Richard Damra Monday, February 4, 2013 Econ 1B03 - Chapter 10 Externalities  Sometimes there are benefits and costs that arise in the market that go uncompensated.  These are called externalities.  A positive externality: a benefit that is enjoyed by society that society didn’t have to pay to receive it. E.g receive shade from neighbors tree  A negative externality: a cost suffered by society and the instigator isn’t made to pay for damage they do. E.g my neighbors dog barks all night + keeps me awake, but she doesn’t compensate me for the lost sleep  So, externalities: Are created when a market outcome affected people other than the buyers and sellers in that market.  Cause welfare in a market to depend on more than just the value to buyers and sellers who actually participate in a market transaction.  Can lead to inefficient markets if buyers and sellers don’t take them (externalities) into account when deciding how much to consume and produce  Negative externalities lead markets to produce more than is socially desirable.  Positive externalities lead markets to produce less than is socially desirable.  Consider the market for steel: Negative Externalities  Richard Damra
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