Economics 1021A/B Chapter Notes -Coase Theorem, Economic Equilibrium, Marginal Cost
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24 Apr 2012
School
Department
Course
Professor
Nicole Wallenburg
Economics
Mr. Parkin
Oct 30, 2011
Economics – Textbook Notes
Externalities in Our Lives
An Externality is a cost of a 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.
An externality that imposes a cost is a negative externality and an externality that
provides a benefit is a positive externality.
Negative Production Externalities
Negative Consumption Externalities
Positive Production Externalities
Positive Consumption Externalities
Negative Production Externalities
The most costly and widespread negative production externalities are:
Congestion
o Drivers on the 401
Time costs and fuel costs
Pollution and Carbon Emission
o Running air conditioning
o Using hot water
o Taking a trip by car, train, or plane
Contributes to pollution and increases your carbon footprint
o Types of Pollution
Air Pollution Cars
Water Pollution Dumping waste in water
Land Pollution Dumping toxic waste on the land
Negative Consumption Externalities
Negative consumption externalities are a source of irritation for most of us
Smoking tobacco in a confined space
o To deal with this, most places ban smoking
o This causes a negative consumption externality on smokers
Noisy parties and outdoor concerts
o To deal with this they could ban loud music
o This causes a negative consumption externality on party-goers
The majority imposes a cost on the minority
Positive Production Externalities
If a honey farmer places beehives beside an orange grower’s orchard, two positive
production externalities arise
o The honey farmer gets a positive production externality from the orange
grower because the bees collect pollen and nectar from orange blossoms
Nicole Wallenburg
Economics
Mr. Parkin
Oct 30, 2011
o The orange grower gets a positive production externality because the bees
pollinate the blossoms
Positive Consumption Externalities
When you get the flu vaccination, you lower your risk of getting infected this
winter
o But if you avoid the flu, your neighbour who didn’t get vaccinated has a
better chance of avoiding it too
When the owner of an old building restores it, everyone who see the building gets
pleasure from it
Negative Externalities: Pollution
To study the economics of the negative externalities that arise form pollution, we
distinguish between the private cost and the social cost of production.
Private Costs and Social Costs
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 one more unit of a good or service
that is borne by the producer of that good or service
An external cost is a cost of producing a good or service that is not borne by the producer
but borne by other people.
A 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 by
everyone else on whom the cost falls – by society.
MSC = MC + Marginal External Cost
Valuing an External Cost
o Economics use market prices to put dollar value on the cost of pollution
External Cost and Output
o The marginal cost curve, MC, describes the marginal private cost borne by
the firms that produce the chemical
Production and Pollution: How Much?
When an industry is unregulated, the amount of pollution it creates depends on the
market equilibrium price and quantity of the good produced.
The supply curve is the marginal private cost curve because when firms make
their production and supply decisions, they consider only the costs that they will
bear.
With an external cost, the allocation is efficient when marginal social benefit
equals marginal social cost
o The unregulated market overproduces, and a deadweight loss is created