Chapter 10 Externalities
Learn the nature of an externality
See why externalities can make market outcomes inefficient.
Examine how people can sometimes the problem on their own.
Consider why private solutions to externalities sometimes do not work.
Examine the various gov't policies aimed at solving the problem of externalities
Firms that sell paper also create a byproduct: DIOXIN: cancer, health problems etc.
Markets do many things well, but not all things well: This chapter covers Principle of:
Gov't can sometimes improve market outcomes. Examine: why markets fail to allocate
resources efficiently, how gov't policies can potentially improve market's allocation, and
what kinds of policies are likely to work best.
In the case of negative externalities, there are two supply curves and one demand curve. The first S curve is
the private supply curve that we learned about in chapter 4. The second S curve is the social supply curve,
which = ( private supply curve + cost of the negative externality). The free market equilibrium is the one that
would exist if the firm were left to its own devices where the private S curve intersects with the D curve.
The social, or the efficient, equilibrium output is the one that is optimal from society's perspective. It occurs
where the social S curve intersects with the D curve. In this case we say that the firm is OVERproducing
from a social point of view; the socially efficient level of output