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EXTERNAL COSTS

EXTERNAL COSTS. WHEN OUR DECISIONS AFFECT OTHER PEOPLE. COSTS. Cost-Benefit Analysis means you weigh the costs and benefits of all of your alternatives ( trade-offs ) Costs can be monetary ( $ ) or they can involve time or risk

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EXTERNAL COSTS

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  1. EXTERNAL COSTS WHEN OUR DECISIONS AFFECT OTHER PEOPLE

  2. COSTS • Cost-Benefit Analysis means you weigh the costs and benefits of all of your alternatives (trade-offs) • Costs can be monetary ($) or they can involve time or risk • There is also opportunity cost. When you decide to do one thing, you are giving up the opportunity to do another thing (your second choice)

  3. EXTERNAL COST (EXTERNALITY) • External costs are costs of your decision, which you don’t have to pay, but may affect someone else (or society) • It places a cost on someone else. (NEGATIVE EXTERNALITY) • There can also be external benefits. Your decision affects other people positively. (POSITIVE EXTERNALITY)

  4. EXTERNAL COST EXAMPLES • For each of the examples… • 1. Identify the economic player (who’s making the decision) • 2. Identify the external cost (or benefit) • 3. Identify who pays the cost (or reaps the benefit)

  5. EXAMPLES • 1. A manufacturing plant causes air pollution. • 2. An on-campus fraternity decides to have a late-night party on a Saturday night in a neighborhood where there are also elderly people and parents with young children.

  6. EXAMPLES • 3. The unregulated use of antibiotics by doctors has led to the emergence of powerful antibiotic-resistant bacteria. • 4. A beekeeper keeps bees in order to collect honey to sell for profit. The bees also pollinate fruit trees in the area.

  7. EXAMPLES • 5. Coal-powered energy plants emit greenhouse gases, which have been associated with climate change. • 6. An individual chooses to fire-proof his home, which means that his neighbors’ risk of fire is also reduced.

  8. EXAMPLES • 7. I decide to drive my car to work, which adds to congestion on the roads and higher accident risks for other drivers. • 8. A parent vaccinates his child to keep the child from contracting a disease. The vaccinated child decreases the likelihood that others in the community will contract the disease.

  9. EXAMPLES • 9. A company dumps toxic waste from its manufacturing plant into a local stream. • 10. A movie-goer uses his cell phone during the movie, to the annoyance of other movie-goers.

  10. SCENARIO 1 • The Broomfield City government keeps track of traffic patterns in the city and county of Broomfield. They have noticed traffic problems on 144th during rush hour. Currently, 144th is a two lane road with one lang going in each direction. The government is trying to decide whether or not to widen the road. • Are there any external costs of this decision?

  11. SCENARIO 2 • A business that makes tires is trying to decide whether to open a factory in an industrial area near your house. The production of rubber for the tires produces smoke and water pollution. • Are there any external costs of this decision?

  12. WHO REFEREES? • In the case of external costs, there is no incentive for the economic player who is causing the problem to change their behavior. Why? • In the case of external costs that affect the entire society, who has to play referee?

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