negative externalities where the free market needs help
Post on 01-Jan-2016
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Negative Externalities
Where the Free Market Needs Help
EXTERNALITIES
• An externality is the uncompensated impact of one person’s actions on another person
Efficiency requires:
• All costs of production must be counted by producers
• If pollution is “not counted” => society bears the costs of production
This is not efficient
Negative Externalities
– Automobile exhaust– Cigarette smoking
– Barking dogs (loud pets)
– Loud stereos in an apartment building
– Noisy Students– Neighbor’s poorly maintained
property
– Pollution
Positive Externalities
– Restored historic buildings– Research into new technologies– Neighbor’s well maintained property
Youtube video—cool examples
MARKET INEFFICIENCY
• Negative externalities lead markets to overproduce
Quantity ofAluminum
0
Price ofAluminum
EquilibriumEquilibrium
Demand(marginal benefit)
Demand(marginal benefit)
Supply(marginal cost)
Supply(marginal cost)
QMARKETQMARKET
Market price should be here
Quantity demanded/supplied at the true price should be here
S2
Specific Examples:
Before
After Regulation/Clean Up Efforts
Lake Erie
Acid Rain
Global Warming
Solutions to Pollution
Increase Government Regulation
a) Tax the pollutant
b) Fine corporations/individuals who pollute
c) Provide incentive to not pollute
oil carbon, etc.
Creating an Incentive to Not Pollute: Cap & Trade System
• Gov’t can create a system of trading pollution credits
[Read Article if time]
Questions to consider:
1.Who is in charge of pollution standards?
2. Should countries all have the same pollution/
environmental standards?
Global Pollution Standards
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