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Chapter 16

ECON 1050 Chapter 16: Econ 1050 Chapter 16

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University of Guelph
ECON 1050
Eveline Adomait

Chapter 16 Externalities in Our Lives  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.  Four different types o Negative production externalities o Negative consumption externalities o Positive production externalities o Positive consumption externalities. Negative production Externalities  Congestion- traffic on the highway, the costs of congestion are time costs and fuel costs. This is a cost of a negative production externality.  Pollution and Carbon emissions- Economic activity, pollutes the air, water, and land, and these individual areas of pollution interact through the eco system. Air pollution is getting worse. Pollution causing holes in the ozone and global warming. o The dumping of industrial waste and untreated sewage and the runoff from fertilizers pollute oceans, lakes and rivers. This can be eliminated by by using chemical process to eliminate waste, or land sites for storage of secure containers. o Land pollution occurs from umping products. Negative Consumption Externalities  A source of irritation for most of us, smoking is an example of a negative consumption externality.  To deal with this problem in many public places smoking is banned and there are limits on smoking.  This imposes a negative consumption externality on smokers.  Noisy parties and outdoor rock concerts are other examples of negative consumption externalities. Simple ban on parties is not a solution as it avoids the external cost of sleep-seeking neighbors, but it results in the sleepers imposing an external cost on the party seekers. Positive Production Externalities  If a honey farmer places beehives beside an orange growers orchard, two positive production externalities arise.  The honey farmer gets a positive production externality from the orange grower because the bees collect pollen and nectar from orange blossoms. And the orange grower gets a positive production externality because the bees pollinate the blossoms. Positive Consumption Externalities  Flu vaccinations generate positive consumption externalities. When you get the shot you lower the risk of getting the infection, now since you have your shot and can avoid the flu, your neighbor has a better chance at avoiding it too. Negative Externality: Pollution Private Cost  A private cost of production is a cost that is borne by the producer of a good or service.  Marginal cost is the cost of producing an additional unit of a good or service.  Marginal Private cost (MC)- is the cost of producing an additional unit of a good or service that is borne by its producer.  An external cost is a cost of producing a good or service that is not borne by the producer but borne by other people.  Marginal External Cost- is the cost of producing an additional unit of a good or service that falls on people other than the producer.  Marginal Social Cost (MSC)- is the marginal cost incurred by the producer and buy everyone else on whom the cost falls- by society. It is the sum of marginal private cost and marginal external cost o MSC=MC + Marginal External Cost. o We express cost in dollars but we must remember that cost is an opportunity cost ex clean air or a clean river is given up to get something.  Valuing an External cost- Economists use market prices to put a dollar value on the cost of pollution. Ex- two similar rivers, one polluted the other clean, 500 homes are built along the side of each river. The homes on clean river rent for 2500, and the homes beside the polluted river rent for 1500. With 500 homes on the polluted river the external cost of pollution is 500,000 a month.  External Cost and Output- (Fig 16.1 shows relationship of quantity of chemical produced and the cost of the pollution it creates) o The marginal cost curve describes the marginal private cost borne by the firms that produce the chemical. Marginal cost increases as the quantity of chemical produced increases. o If firms dump waste into the river they impose an external cost that increases with the amount of chemical produced. o MSC is found by adding the marginal external cost to the marginal private cost. Ex business produces 4000 tones of chemical a month, its marginal private cost is 100 and marginal external cost is 125, so marginal cost is 225 a tonne. o When quantity of a chemical produced increases the external cost of pollution increases. Production and Pollution how much?  When an industry is unregulated and free to pollute the amount of pollution it creates depends on market equilibrium price and quantity of the good produced.  In fig 16.2 the demand curve for a pollution creating chemical is D. This curve also measures the marginal social benefit, MSB
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