Purpose of the lesson

1. Purpose of the lesson Examine Market Problems caused by the decisions of producers and consumers that result in cost or benefits for third parties who neither produce/consume these products. AKA Externalities

2. Market Failure • Market prices usually reflect the benefits and costs received by the producers and consumers involved in an exchange. • A kind of market failure occurs when market prices DO NOT reflect all the costs and all the benefits involved. • This type of market failure is calledan externality.

3. Video on potato chip example • https://www.youtube.com/watch?v=ljrBEdg-QU4

4. Externalities • Externalities exist when some of the costs or benefits associated with the production or consumption of a product "spill over" to third parties, who do not produce or pay to consume the product. • Negative externalities are costs paid by someone who does not produce or pay to consume a product. • Examples? Cigarette smoking: secondhand smoke; health costs

6. Externalities • Positive externalities are benefits enjoyed by someone who does not produce or pay to consume a product. • Examples? Education: society benefits from increased productivity; less crime; lower rates of poverty; etc.

7. Positive or Negative Externalities • Driving a car on crowded highway? • Negative: exhaust fumes, etc. • Apartment dwellers who buy fire alarms or fire extinguishers? • Positive: other dwellers benefit • Neighbor playing loud music while you study? • Negative: you bear cost of not concentrating • New landscaping in neighbor’s yard? • Positive: increases value of houses in neighborhood.

8. Role Play • Five students needed for Part 1 • Mama Smith • Papa Smith • Teenage Child 1 • Teenage Child 2 • Reader who will dictate the passages • Part 2 Need 1 “Snively Whiplash” & rest landowners

9. Activity 12.2: Externalities Worksheet S1 Price S P1 P D 0 Quantity (Tons of Steel) Q1 Q

10. Activity 12.2: Externalities Worksheet Price S P1 P D1 D 0 Q Q1 Quantity (Years of Education)