文档介绍：Chapter 5 - Externalities
Public Economics
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Externality Defined
An externality is present when the activity of one entity (person or firm) directly affects the welfare of another entity in a way that is outside the market mechanism.
Negative externality: These activities impose damages on others.
Positive externality: These activities benefits on others.
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Examples of Externalities
Negative Externalities
Pollution
Cell phones in a movie theater
Congestion on the
Drinking and driving
Student cheating that changes the grade curve
The “Club” anti-theft devise for automobiles.
Positive Externalities
Research & development
inations
A neighbor’s nice landscape
Students asking good questions in class
The “LoJack” anti-theft devise for automobiles
Not Considered Externalities
Land prices rising in urban area.
Known as “pecuniary” externalities.
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Nature of Externalities
Arise because there is no market price attached to the activity.
Can be produced by people or firms.
Can be positive or negative.
Public goods are special case.
Positive externality’s full effects are felt by everyone in the economy.
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Graphical Analysis: Negative Externalities
For simplicity, assume that a steel firm dumps pollution into a river that harms a fishery downstream.
Competitive markets, firms maximize profits
Note that steel firm only care’s about its own profits, not the fishery’s
Fishery only cares about its profits, not the steel firm’s.
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Graphical Analysis, continued
MB = marginal benefit to steel firm
MPC = marginal private cost to steel firm
MD = marginal damage to fishery
MSC = MPC+MD = marginal social cost
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Figure
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Graphical Analysis, continued
From figure , as usual, the steel firm maximizes profits at MB=MPC. This quantity is denoted as Q1 in the figure.
Social welfare is maximized at MB=MSC, which is denoted as Q* in the figure.
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Graphical Analysis, Implications
Result 1: Q1>Q*
Steel firm privately produces “too much” steel, because it does not ac