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Externalities

Externalities. Market Failures: When the Market Fails. Market Failures. Occur when the market fails to allocate resources efficiently. Examples of Market Failures Collusion Price fixing Predatory pricing Externalities. T-Shirts.

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Externalities

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  1. Externalities Market Failures:When the Market Fails

  2. Market Failures Occur when the market fails to allocate resources efficiently Examples of Market Failures • Collusion • Price fixing • Predatory pricing • Externalities T-Shirts Without a market failure, when S = D, Social Welfare is maximized

  3. Reading #1: Naked Economics Externalities

  4. EXTERNALITY Summary • An externalityis the uncompensated impact of a person/business on another person/society • Both positive & negative externalities exist • All externalities are market failures • Spillover Costs- costs that fall on society • Occur with negative externalities • Cause production to be too high • Spillover Benefits- benefits that fall on society • Occur with positive externalities • Cause production to be too low

  5. Factory A Factory B

  6. Externality Review Owning a Car Private Costs (internal costs) gas, insurance, repair Social Costs (external costs) pollution, traffic, noise All costs of production or activity must be counted for markets to be efficient!

  7. Crash Course Economics: Externalities start at 4:51 in video https://www.youtube.com/watch?v=13JOGWzY8kE

  8. Negative Externalities • Automobile exhaust • Cigarette smoking • Barking dogs (loud pets) • Loud stereos in apartments • Noisy Students • Neighbor’s poorly maintained property • Driving or parking poorly • Pollution

  9. Positive Externalities • Immunizations • Restored historic buildings • Research into new technologies • Neighbor’s well maintained property • Volunteer work

  10. Correcting Externalities • Government action can correct a market failure • Taxes & subsidies are the primary tools • Negative externalities lead markets to overproduce • correct by Gov’t taxing externality • Positive externalities lead markets to under-produce • correct by Gov’t subsidizing externality

  11. S2 ----------- P2 E2 ------------------ Q2 Correcting a negative externality Bottle Water Production Bottled Water production causes external costs of $0.50 per bottle • Tax Soda cans the amount of spillover cost • Spillover cost = external costs • Supply shifts left • New equilibrium is socially efficient • Price rises & quantity produced falls Internalizing an externality is making sure people pay for all costs of production

  12. Switzerland & Garbage 35 Liter Swiss Trash Bag

  13. Bottled Water What is the real cost? Start 20 minutes in…

  14. Documentary

  15. Plastic water bottles introduced

  16. Only 11 states have recycle deposits laws Only 20% of U.S. water bottles are recycled

  17. .

  18. Externality Practice Problems

  19. Internalizing Negative Externalities SUV’s have spillover costs = $5,000 per SUV Large SUV Production S2 Impose Tax producers = $5,000 (exact size of spillover cost) Shifts Supply Curve left. The market “shrinks” Q2 is the socialy optimaloutput S P2 --------------- E2 -------------------- D Q2

  20. Subsidizing Positive Externalities Electric cars have external benefits = $5,000 Electric Cars Impose Subsidy= $5,000 spillover benefit Shifts demand curve right Market “expands” Q1 => Q2 Reach socially optimal output ----------------------- P2 E2 ----------------- S Q2 D2 D

  21. Should Gov’t “nudge” people? Econs vs. Humans Areas to nudge people

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