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Economics 1021A/B Lecture Notes - Ecotax, School Voucher, Coase Theorem

Course Code
ECON 1021A/B
Jeannie Gillmore

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Chapter 16 Notes
an externality is a cost or benefit that arises from production and falls on someone
other then the producer OR a cost or benefit that arises from consumption and falls
on someone other than the consumer
o an externality that imposes a cost is called a negative externality
o an externality that provides a benefit is called a positive externality
four overall types of externalities:
o negative production
o negative consumption
o positive production
o positive consumption
Negative Production Externalities
congestion, pollution, and carbon emission are the sources of the most costly and
widespread negative production externalities
o traffic on the 401 slows as trucks and commuters compete for a position on
the highway
o the costs of congestion are time and fuel costs
pollution and carbon emission
o economic activity pollutes air, water, and land, and these individual areas of
pollution interact through the ecosystem
water pollution
o the dumping of industrial waste and untreated sewage and the runoff from
fertilizers pollute oceans, lakes and rivers
alternatives include chemical processing of waste or using land sites
for storage of nuclear waste
land pollution
o arises from dumping of toxic waste products
o recycling is an alternative, but requires an investment
Negative Consumption Externalities
examples include:
o smoking tobacco in confined spaces
o noisy parties
o loud dogs
Positive Production Externalities
Example: honey farmer placing beehives beside orange grower’s orchard
o honey farmer gets bees that have collected pollen and nectar from orange
o orange farmer gets bees to pollinate the blossoms

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Positive Consumption Externalities
examples include:
o flu vaccine
helps both you and others around you who didn’t get it
o CN Tower in Toronto
o education
Negative Externality: Pollution
a private cost of production is a cost that is
borne by the producer of a good or service
o marginal private cost (MC) is the
cost of producing an additional unit of
a good or service that is borne by its
an external cost is a cost of producing a good
or service that is not borne by the producer
but borne by other people
o marginal external cost is the cost of
producing an additional unit of a good
or service that falls on people other
than the producer
o market price is used to put a dollar value on the cost of external costs
marginal social cost is the marginal cost incurred by the entire society
o MSC = MC + Marginal External Cost
Producing with Pollution
when an industry is unregulated and free to
pollute, the amount of pollution it creates
depends on the market equilibrium price and the
quantity of good produced
equilibrium is inefficient
o allocation of resources is efficient when
MSC equals MSB
o however, we must account for all of the
costs (both private and external)
o production that occurs above this leads
to a deadweight loss
Property Rights
property rights help to reduce the inefficiency that arises from external costs
o property rights are legally established title to ownership, use, and disposal of
factors of production and goods and services that are enforceable in the courts
Example: suppose that a chemical factory own the river and 500 homes alongside it
o the rent that people are willing to pay depends on the amount of pollution
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