Externalities SFLS part1

Externalities

Part 1

Market FailureOne type of market failure:

Externality, the uncompensated impact of one person’s actions on the well-being of a bystander.

Self-interested buyers and sellers neglect the external costs or benefits of their actions on society, so the market outcome is not efficient for everyone.

Externalities can be negative or positive, depending on whether impact on bystander is adverse or beneficial. (good or bad)

Textbook definition: - is a cost or a benefit that arises from:Production that falls on someone other

than the producer.Consumption that falls on someone other

than the consumer.

Shorter definition: - the uncompensated 无补偿的 impact of

one person’s actions on the well-being of a bystander or third party.

Easier definition: - Stuff that affects other people.

Externalities

1.) Externality Types2.) The Graphs3.) Solutions

Market Failure - Externalities

Negative Externalities - Unintended costs.

- A production or consumption activity that creates an external cost.

Negative consumption

Negative production

1.) Externality Types


Negative production



Negative production



Negative production



Negative production


Demerit Goods - Goods with negative externalities and considered socially undesirable.


Positive Externalities

Positive consumption

Positive production


- Unintended benefits.- A production or

consumption activity that creates an external benefit.

Positive consumption Positive production 1.) Externality Types

疫苗





Merit Goods

1.) Externality TypesGoods with positive

externalities of which more is desired then would typically be produced.

1.) Externality Types2.) The Graphs


2.1) Negative2.2) Positive

3.) Solutions

Means an additional one, the measurement from one unit to the next. 最后的东西之一

Marginal Benefits VS. Marginal Costs 边际效益针对边际成本 (MB) (MC)

If MB > MC = It is worth doing 这是值得的If MB = MC = It may be worth doing “a wash” 收支平衡If MB < MC = Not worth doing 这是不值得的

Also called Cost/Benefit analysis

Marginal Thinking

– Training your brain to understand value训练你的大脑明白什么意思值

Marginal Benefit

Marginal Thinking

The value of one more unit of a good or service is its marginal benefit. can be measured as

the maximum price that people are willing to pay for another unit of the good or service.

Demand and Marginal Benefit

- Buyers distinguish 区别 between value and price.- Value is what the buyer gets.- Price is what the buyer pays.

If we looked at a larger market with many more buyers, each would be a step on this curve

It looks just like a demand curve doesn’t itThat’s because it is!

D = MB

P

Q

Demand = Marginal Benefit

Remember this?





Marginal Thinking


Marginal Social Benefits VS. Marginal Social Costs 边际效益针对边际成本 (MB) (MC)

If MSB > MSC = It is worth doing 这是值得的If MSB = MSC = It may be worth doing “a wash” 收支平衡If MSB < MSC = Not worth doing 这是不值得的


Marginal Thinking

( MPC ) Marginal Private Cost ( MC )

- The cost of producing an additional unit of a good or service that is borne by the producer of it.*Supply =MC = MPC

2.) The Graphs

P

QMB

P

MC = MPCMarginal Costs = Marginal Private Costs

EQ

MC - Typical market equilibrium that we have studied so far.

2.) The Graphs


2.) The Graphs

( MEC ) Marginal External Cost

- The cost of producing an additional unit of a good or service that falls on people other than the producer.*** The more

produced the higher the costs.

P

QMB

P

MECMarginal External Costs

Negative Externalities

- At any given output the external costs to all are higher then the private costs

- The more that is produced the higher the costs become

EQ

External cost

MC


2.) The Graphs

( MEC ) Marginal External Cost

( MSC ) Marginal Social Cost

+

=- The marginal

cost incurred by the entire society

P

QMB

MSCMarginal Social CostsMPC + MEC = MSC

The marginal cost incurred by the entire society – everyone – the people that produce it and all other third parties affected by it

External cost

MSC

MC

2.) The Graphs

P

QMB

P

EQ

External cost

MSC

MC

The MPC production point is not efficient from a societal view, too much is produced.

MB = MSC is the efficientproduction point

froma societal view.

EQ1

P1

2.) The Graphs

P

Q

P

Deadweight loss occurs for society at MPB.

The marginal cost incurred by the entire society – everyone – the people that produce it and all other third parties affected by itEQ

MSC

MC

MB=MPB

P1

EQ1

2.) The Graphs

0

1

2

3

4

5

0 10 20 30 Q (gallons)

P $

The market for gasoline

Another Example of a Negative Externality:

Supply (private cost)

External cost = value of the negative

impact on bystanders

= $1 per gallon(value of harm from smog, greenhouse gases)

Social cost = private + external cost

0

1

2

3

4

5

0 10 20 30 Q (gallons)

P $


D

S

The socially optimal quantity is 20 gallons.

At any Q < 20, value of additional gas is higher then social cost. At any Q > 20, social cost of the last gallon isgreater than its value to society.25

Demand

Private

cost

Social Cost


0

1

2

3

4

5

0 10 20 30 Q (gallons)

P $


D

S


At any Q < 20, value of additional gas is higher then social cost.

25

Demand And there is a deadweight loss

Private

cost

Social Cost


0

1

2

3

4

5

0 10 20 30 Q (gallons)

P $


D

S


At any Q > 20, social cost of the last gallon isgreater than its value to society.

25

Demand And there is a deadweight loss

Private

cost

Social Cost


1.) Externality Types2.) The Graphs


2.1) Negative2.2) Positive

3.) Solutions

( MPB ) Marginal Private Benefits ( MB )

2.) The Graphs- The benefit of an

additional unit of a good or service that the consumer of that good or service receives.

*Demand = MB = MPB

P

QMB

P

MB = MPBMarginal Benefits = Marginal Private Benefits

- Typical market equilibrium that we have studied so far.

EQ

MC

2.) The Graphs


2.) The Graphs

- The benefit of an additional unit of a good or service that people other than the consumer of the good or service enjoy.

( MEB ) Marginal External Benefit

*** The more consumed the benefits diminish.

P

Q

P

MEBMarginal External Benefits

- At any given point the external benefits of society are greater then that of the individual

- As more is produced the benefits typically become smaller

EQ

External benefit

MC

MB

2.) The Graphs


2.) The Graphs

( MEB ) Marginal External Benefit

- The marginal benefit enjoyed by society.

( MSB ) Marginal Social Benefit

+

=

P

Q

P

MSBMarginal Social Benefits

- The cost of producing an additional unit of a good or service that falls on people other than the producer.EQ

External benefit

MC

MB

MSBMPB + MEB =

MSC

2.) The Graphs

P

Q

P

EQ

MCMSB

P1

EQ1

MB = MPB

The MPB production point is not efficient from a societal view, not enough is produced.

MC = MSB is the efficientproduction point


2.) The Graphs

P

Q

P

EQ

MCMSB

P1

EQ1

MB = MPB


Not enough is produced from the view from society

2.) The Graphs

Negative Externality- Market quantity larger than socially desirable- Overproduction

Positive Externality- Market quantity smaller than socially desirable- Underproduction

Next:To remedy the problem: “internalize the externality” 内部化的外部性 tax goods with negative externalities subsidize goods with positive externalities Create government regulation and laws to prevent the problem

Effects of Externalities: Summary

So to Summarize….





Marginal Thinking


Marginal Social Benefits VS. Marginal Social Costs 边际效益针对边际成本 (MB) (MC)

If MSB > MSC = It is worth doing 这是值得的If MSB = MSC = It may be worth doing “a wash” 收支平衡If MSB < MSC = Not worth doing 这是不值得的


Marginal Thinking

P

QMB

P

EQ

External cost

MSC

MC

The MPC production point is not efficient from a societal view, too much is produced.

MB = MSC is the efficientproduction point


EQ1

P1

2.) The Graphs

P

Q

P


The marginal cost incurred by the entire society – everyone – the people that produce it and all other third parties affected by itEQ

MSC

MC

MB=MPB

P1

EQ1

2.) The Graphs

P

Q

P

EQ

MCMSB

P1

EQ1

MB = MPB

The MPB production point is not efficient from a societal view, not enough is produced.

MC = MSB is the efficientproduction point


2.) The Graphs

P

Q

P

EQ

MCMSB

P1

EQ1

MB = MPB


Not enough is produced from the view from society

2.) The Graphs

Goods with ExternalitiesDemerit Goods Goods with negative

externalities and considered socially undesirable.

Merit Goods Goods with positive externalities of which more is desired then would typically be produced.

The End

Thanks!

Education

Externalities SFLS part1