Externalities

U



Market failure the
When pricemechanism leads to a misallocation of
· ->


resources

leads to
->
price mechanism a
price or
quantity that
is not
best

for society

market
- failure


live
externalities
natconsumers or
producers
---
-> costs on third parties outside the price mechanism




-esumption
externaltieparties as the results consumption of
of a
god
e

2,
g ziggarettes, alchad, driving laws No
diagram
Neg External costs
-externalities:
costs affectthird
that parties of the results production
of of
a
good
e,
g buildings, factories

inside price mechanism:Private costs (PC) -



costs of
supplying for the producer

benefits
Private (PB) benefits the
enjoyed by
-

consumer




Diagram:

Supply curve:Marginal cost
private (MPC):Lowest price thatproducer is
willing to sell their
good for

Demand curve:
Marginal private benefit (MPB):Highestprice the consumer is willing pay for to a
good
MSC

costs/ S MPC
socially
=




Benefits efficient
equilibrium
N et benefit:SB-SC welfare
I
=




welfare
loss
welfare
gain
· when MSC= MSB - welfare:0=> socially
efficient
equilibrium
P . ->




Marelibrium
I
MSC

Lost
wears on
I
s
I
Benefit
I
·n.
-
↑

I
I
D MPB MSB
=




external
=




I

CostSV ⑧ B
social
market - I



MPBMSB
=




-m
S




External cost stays 9
ea
ed
--
Q
②S

same as 0, incrast
overproduction overprodumexternal costs
social cost PC+ External costs increase as
=


- production
increases
Govt thinks of

↳ social benefits:PB External Benefits +




for neg externalities social benefit PB 0
=
+
-> SB: PB MSB:MPB =


external benefit 0 =