ECON 1110 Chapter Notes - Chapter 16: Influenza Vaccine, Marginal Utility, Rush Hour
12 Jan 2017
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Wednesday, October 19, 2016
Chapter 16: Externalities
1. Externality: External benefits and external costs
a. Occurs when individuals impose costs or deliver benefits to others, but don’t
have economic incentive to take those costs or benefits into account when
making decisions
b. Arise from the side effect of actions
c. Cause inefficiency
2. External Cost: Uncompensated cost that an individual or firm imposes on others
a. Side effect that imposes costs on others
b. Not taking into account the cost to other people
c. Also known as a negative externality
d. Example: The external cost of traffic congestion
i. An individual who chooses to drive during rush hour increases congestion
and has no incentive to take into account the inconvenience inflicted on
other drivers
ii. Texting while driving
3. One of the principal sources of market failure is actions that create side effects that are
not properly taken into account
a. Actions that create externalities
4. External Benefits: Uncompensated benefit that an individual or firm confers on others
a. Also known as a positive externality
b. Example: Getting a flu shot
i. You are less likely to pass the flu on to people you come into contact with
5. Marginal Social Cost of Pollution: The additional cost imposed on society as a whole
by an additional unit of pollution
6. Marginal Social Benefit of Pollution: Additional gain to society as a whole from an
additional unit of pollution
a. The goods and services that could be had by society if it tolerated another unit of
pollution
b. The methods of reducing pollution have an opportunity cost: avoiding pollution
requires using scarce resources that could have been employed to produce other
goods and services
7. Socially Optimal Quantity: Quantity that society would choose if all the costs and
benefits were accounted for
a. Qopt
b. Intersection between MSC and MSB
8. Marginal Social Cost Curve (MSC): Upward sloping
a. Example: As pollution increases, the MSC increases
9. Marginal Social Benefit Curve (MSB): Downward sloping
a. Example: As pollution increases, the MSB decreases
10. In a market economy without government intervention, polluters are the only ones
making decisions
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