PUP-3002 Lecture Notes - Lecture 7: Externality
5 Apr 2018
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Document Summary
Environmental problems often arise in an unregulated free market. When producing a good, the environment is often harmed. Members of society are harmed by environmental degradation. The consumer and producer do not pay for damages. If the consumer and producer to not pay for the cost of pollution, they end up producing more of a good. When too much of a certain good is produced or consumed relative to the overall costs and benefits to society. A factory that produces automobile tires and pollutes the air of the citizens living around the factory. Farmers fertilize their crops with chemicals that leach into the ground water used by a community. An added cost applied to a good or service thought to be generating a negative externality. Increases the cost of a good to incorporate the cost of the negative externality. If the tax per unit equals the cost of the externality per unit, societal consumption and production will be societally efficient.
