Social cost
The socially optimal quantity is 20 gallons.
S
3
2
D
At any Q < 20, value of additional gas exceeds social cost
1
0 0
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At any Q > 20, social cost of the last gallon is greater than its value
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EXTERNALITIES
12
Positive Externalities
In the presence of a positive externality,
the social value of a good includes • private value – the direct value to buyers • external benefit – the value of the positive impact on bystanders
Air pollution from a factory.
• The firm does not bear the
full cost of its production, and so will produce more than the socially efficient quantity.
How govt may improve
7
Recap of Welfare Economics
P $5
4 3 $2.50
The market for gasoline
The market eq’m maximizes consumer + producer surplus. Supply curve shows private cost, the costs directly incurred by sellers
EXTERNALITIES
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13
1: Analysis of a positive externality
ACTIVE LEARNING P The market for flu shots
$50
External benefit = $10/shot
40 30
20 10 0 0 10 20 30 S
P $5
4 3
The market for gasoline
Social cost = private + external cost
external cost
Supply (private cost)
2 1
0 0
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External cost = value of the negative impact on bystanders
10
10
20 25 30 Q (gallons)
EXTERNALITIES
Analysis of a Negative Externality
P $5
4
The market for gasoline
Social cost
S
3
Market eq’m (Q = 25) is greater than social optimum (Q = 20) One solution: tax sellers $1/gallon, would shift supply curve up $1.
roads less safe for others
health risk to others from second-hand smoke
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EXTERNALITIES
5
Positive Externalities from Education A more educated population benefits society:
• lower crime rates:
•
educated people have more opportunities, so less likely to rob and steal better government: educated people make better-informed voters
11
2
D
1
0 0
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10
20 25 30 Q (gallons)
EXTERNALITIES
“Internalizing the Externality”
Internalizing the externality: altering incentives
so that people take account of the external effects of their actions
The socially optimal Q maximizes welfare: • At any lower Q, the social value of
•
additional units exceeds their cost. At any higher Q, the cost of the last unit exceeds its social value.
the market outcome:
• Impose a tax on the firm equal to the
external cost of the pollution it generates
CHAPTER 10 EXTERNALITIES
4
Other Examples of Negative Externalities
2 1
0 0
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Demand curve shows private value, the value to buyers (the prices they are willing to pay)
10 20 25 30 Q (gallons)
8
EXTERNALITIES
Analysis of a Negative Externality
• subsidize cost of education
EXTERNALITIES
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6
Other Examples of Positive Externalities
Being vaccinated against
contagious diseases protects not only you, but people who visit the salad bar or produce section after you.
= $1 per gallon (value of harm from smog, greenhouse gases)
9
10
20
30 Q (gallons)
EXTERNALITIES
Analysis of a Negative Externality
P $5
4
The market for gasoline
Draw the social
value curve.
Find the socially
optimal Q.
What policy would
D
internalize this externality?
Q
14
ACTIVE LEARNING
Answers
$50
1:
Socially optimal Q = 25 shots To internalize the externality, use subsidy = $10/shot.
the neighbor’s barking dog late-night stereo blasting from the dorm room
next to yours
noise pollution from construction projects talking on cell phone while driving makes the
People do not consider these external benefits
when deciding how much education to “purchase”
Result: market eq’m quantity of education too low How govt may improve the market outcome:
R&D creates knowledge
others can use
Renovating your house
increases neighboring property values
CHAPTER 10 EXTERNALITIES
Thank you for not contaminating the fruit suppห้องสมุดไป่ตู้y!
In the previous example, the $1/gallon tax on
sellers makes sellers’ costs equal to social costs.
When market participants must pay social costs,
the market eq’m matches the social optimum. (Imposing the tax on buyers would achieve the same outcome; market Q would equal optimal Q.)