Microeconomics 101: Ch.16, Externalities

The additional cost imposed on society as a whole by an additional unit of something (like pollution). Tends to be an upward sloping line. MSC is upward sloping and shows how the marginal cost to society of an additional amount of pollution (or some other externality) varies with the quantity. Often, things like pollution have a low cost when they are present in small amounts because the environment can tolerate low amounts safely, but this is not true at higher levels.

The additional benefit to society from an additional unit of something (like pollution, power plants could save money if they weren't forced to buy expensive low sulfur coal, and if they didn't have to worry about this pollution then the savings would be a marginal benefit to society). Tends to be a downward sloping line. MSB is downward sloping because it's progressively harder, and therefore, more expensive to achieve a further reduction in pollution as the total amount falls.

The quantity of pollution (or some other externality) society would choose if all its costs and benefits were accounted for.

An uncompensated cost that an individual or firm imposes on others.

A benefit that an individual or firm confers on others without receiving compensation.

External costs and benefits are known as externalities. Something that affects somebody else. External costs are negative externalities and external benefits are positive externalities.

The idea that even in the presence of externalities an economy can always reach an efficient solution as long as transaction costs are sufficiently low.

The costs to individuals of making a deal, need to be sufficiently low for the Coase Theorem to take effect.

When individuals or firms take external costs and benefits into account when making decisions about whether or not to do more or less of an activity.

Rules that protect the environment by specifying actions by producers and consumers.

A tax that depends on the amount of pollution a firm produces. An emission tax equal to the marginal social cost at the socially optimal quantity of pollution induces polluters to internalize the externality-to take into account the true costs to society of their actions.

Taxes designed to reduce external costs. When markets are efficient, a tax gets revenue (box from point where MSC intersects MB down to where it touches MC line slide 28 L14) but makes the outcome inecient? Here, got BACK to being ecient, we have no DWL, AND we get tax revenue!

Licenses to emit limited quantities of pollutants that can be bought and sold by polluters.

A payment designed to encourage activities that yield external benefits, like giving scholarships to students who wouldn't otherwise go to college.

An external benefit that occurs when knowledge spreads among individuals and firms.

A good is subject to positive feedback when success breeds further success and failure breeds further failure.

When the value of a good increases when a large number of other people also use the good. Prevalent in communications, transportation, and high tech industries.

For a negative externality,
MSB = MB + 0 = MB
(no external benefit for a negative externality)
and
MSC = 0 + MEC
(no personal cost for an externality . . . because it's external)

MSC = MC + externality cost
MSB=MB

For a positive externality,
MSB = 0 + MEB = MEB
(no internal bene#t for a positive externality)
and
MSC = MC + 0 = MC
(no external cost, because it's a positive externality)

Negative externalities of electricity production by burning coal

Model 1: pollution in its own market to find the "socially optimal" quantity of pollution
for electricity
Model 2: pollution as a byproduct of production in the market

Model 1: market for the externality
-Market will arrive where MSB of externality = 0, ignore MSC
-Social Surplus maximized, MSB externality=MSC externality

Model 2: market for the good that produces the externality
-Market will arrive where MB of good=MC of Good
-Social Surplus Maximized:MSB of good=MSC of good.

End result of either model: goods with externalities mean private choice will be socially suboptimal.
-for negative externality, private market will overproduce (firms keep trying to make profit, don't consider side affects)
-positive externalities private market will underproduce (people don't care how much their education will benefit others, just themselves).