ECN 104 Chapter 10: Chapter 10 - Externalities

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self-interested buyers and sellers neglect the external costs or benefits of their actions, so the market outcome is not efficient. In presence of externalities, public policy can improve efficiency. health risk to others from second-hand smoke. Internalizing the externality: altering incentives so that people take account of the external effects of their actions. In our example, the /gallon tax on sellers makes sellers costs = social costs. when market participants must pay social costs, market eq m = social optimum. (imposing the tax on buyers would achieve the same outcome; market q would equal optimal q. being vaccinated against contagious diseases protects not only you, but people who visit the salad bar or produce section after you. people going to college raise the population s education level, which reduces crime and improves government. Examples: limits on quantity of pollution emitted requirements that firms adopt a particular technology to reduce emissions.