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

10 views7 pages
24 Apr 2012
Department
Nicole Wallenburg
Economics
Mr. Parkin
Oct 31, 2011
Economics Lecture #13
Externalities in our Lives
An externality is a cost or benefit that arises from production and falls on someone other
than the producer. Or a cost or benefit that arises from consumption and falls on someone
other than the consumer
A negative externality imposes a cost and a positive externality creates a benefit
Negative production externality
Positive production externality
Negative consumption externality
Positive consumption externality
Negative Production Externalities
Very common
Examples:
o Noise from trucks and aircrafts
o Polluted rivers and lakes
o The destruction of animals habitats
o Air pollution in major cities from auto exhaust
Positive Production Externalities
Less common than negative production externalities
Example:
o Two examples arise in honey and fruit production.
o By locating honeybees next to a fruit orchard, fruit production gets an
external benefit from the bees, which pollinate the fruit orchards and boost
fruit output; and honey production gets an external benefit from the
orchards
Negative Consumption Externalities
Common part of every day life
Example:
o Smoking in a confined space posed health risks to other
o Noisy parties or loud music disturb others
Positive Consumption Externalities
Common part of every day life
Example:
o When you get a flu vaccine, everyone you come in contact with benefits
Unlock document

This preview shows pages 1-2 of the document.
Unlock all 7 pages and 3 million more documents.

Already have an account? Log in
Nicole Wallenburg
Economics
Mr. Parkin
Oct 31, 2011
Negative Externalities: Pollution
Private Costs and Social Costs
A private cost of production of production is a cost that is borne by the producer, and
marginal private cost (MC) is the private cost of producing one more unit of a good or
service
An external cost of production is a cost that is not borne by the producer, but is borne by
others.
Marginal external cost is the cost of producing one more unit of a good or service that
falls on people other than the producer.
Marginal social cost is the marginal cost incurred by the entire society by the producer
and by everyone else who the cost falls and is the sum of marginal private cost and
marginal external cost
MSC = MC + Marginal external cost
We express cost in dollars but remember that the dollars represent the value of a forgone
opportunity. Marginal private cost, marginal social cost, and marginal external cost all
increase with output.
Figure 16.1 illustrates the MC curve,
the MSC curve,
and marginal external cost as the vertical distance
between the MC and MSC curves.
Production and Pollution: How Much?
In the market for a good with an externality that is unregulated, the amount of pollution
created depends on the equilibrium, quantity of the good produced.
Figure 16.2 shows the equilibrium in an unregulated
market with an external cost.
The quantity produced is where marginal private cost
equals marginal social benefit.
Unlock document

This preview shows pages 1-2 of the document.
Unlock all 7 pages and 3 million more documents.

Already have an account? Log in

Get OneClass Notes+

Unlimited access to class notes and textbook notes.

YearlyBest Value
75% OFF
$8 USD/m
Monthly
$30 USD/m
You will be charged $96 USD upfront and auto renewed at the end of each cycle. You may cancel anytime under Payment Settings. For more information, see our Terms and Privacy.
Payments are encrypted using 256-bit SSL. Powered by Stripe.