文档介绍：Externalities
Chapter 10
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Market Efficiency - Market Failures
Recall that: Adam Smith’s “invisible hand” of the marketplace leads self-interested buyers and sellers in a market to maximize the total benefit that society can derive from a market.
But market failures can still happen.
Market Failures: Externalities
When a market e affects parties other than the buyers and sellers in the market, side-effects are created called externalities.
Externalities cause markets to be inefficient, and thus fail to maximize total surplus.
An externality arises...
. . . when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives pensation for that effect.
Market Failures: Externalities
When the impact on the bystander is adverse, the externality is called a negative externality.
When the impact on the bystander is beneficial, the externality is called a positive externality.
Automobile exhaust
Cigarette smoking
Barking dogs (loud pets)
Loud stereos in an apartment building
Examples of Negative Externalities
Immunizations
Restored historic buildings
Research into new technologies
Examples of Positive Externalities
The Market for Aluminum...
Quantity of
Aluminum
0
Price of
Aluminum
QMARKET
Demand
(private value)
Supply
(private cost)
Equilibrium
The Market for Aluminum and Welfare Economics
The quantity produced and consumed in the market equilibrium is efficient in the sense that it maximizes the sum of producer and consumer surplus.
The Market for Aluminum and Welfare Economics
If the aluminum factories emit pollution (a negative externality), then the cost to society of producing aluminum is larger than the cost to aluminum producers.