Deadweight loss from positive externality XB MBPVT + XB Social Demand MBSO C QSO P ric e Private Demand MC QP VT MBP VT Private Social.. Effects of Externalities[r]
Trang 1Externalities and Property
Rights Chapter 10
Trang 2Learning Objectives
1 Define negative and positive externalities and
analyze their effect on resource allocations
2 Discuss and explain the Coase Theorem
3 Explain how the effects of externalities can be
remedied and discuss why the optimal amount of
an externality is almost never zero
4 Illustrate the tragedy of the commons and show
how private ownership is a way of preventing it
5 Define positional externalities and their effects, and
show how they can be remedied
Trang 3External Costs and Benefits
• An external cost is a cost of an activity that falls
on people other than those who pursue the
activity
• An externality is the name given to an external
cost or external benefit of an activity
• An external benefit is a benefit of an activity
received by people other than those who pursue the activity
Trang 4Externalities Affect Resource
Allocation
• Externalities reduce economic efficiency
possible, government intervention or other collective action may be used
Trang 5• Phoebe harvests and sells honey from her bees
• The bees provide a free service to the local
farmers
– Social costs are less than social benefits
When external benefits exist, maximizing private profits produces less
Trang 6Honeybee Keeper – Scenario 2
• Phoebe harvests and sells honey from her bees
• People at a neighboring school and nursing
home are bothered by bee stings
• The bees are a nuisance to the neighbors
– Social costs are greater than social benefits
When external costs exist, maximizing private profits produces more
than the social optimum
Trang 7External Cost
Quantity (tons/year)
12,00
0
1.3
D
Private MC
$1,000/ton
External Costs
No External Cost
Quantity (tons/year)12,000
Private MC
2.3
Social MC
2.0
8,000
Trang 8Positive Externality for
Consumers
Deadweight loss from positive externality
XB
MBPVT +
XB
Social Demand
MBSO
C
QSO
Private Demand
MC
QP VT
MBP VT
Trang 9Effects of Externalities
With externalities, private market outcomes
do not achieve the largest possible economic surplus
Cash is left on the table
Trang 10Remedying Externalities
• With externalities, private market outcomes do
not achieve the largest possible economic
surplus
• For example, with monopolies, output is lower
than with prefect competition
market
• With externalities, actions to capture the surplus are likely