Chap13

• Externalities


  The effects on people not directly involved in the production and/or consumption of a good or service (third parties such as local residents, organisations, property owners or resources such as rivers)
• Spill-over effects


  The effect that one situation or problem has on another situation
• Types of externalities


  • Negative externalities
  • Positive externalities
• Negative externalities


  Production and/or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid
• Positive externalities


  Production and/or consumption impose external benefits
• Social cost


  Private cost + External cost (for negative externalities)
• When negative production externalities exist, social costs exceed private cost, leading to over-production and market failure if producers do not take into account the externalities
• Types of external costs

  • External costs from production
  • External costs from consumption
• External costs from production

  Pollution, noise, waste discharges from factories
• External costs from consumption

  Pollution from driving, smoking, noise pollution from loud music
• Private costs


  Costs faced by the producer or consumer directly involved in a transaction
• External costs


  Costs faced by third parties not involved in a transaction
• External benefits of education

  • Better jobs, more money, better quality of life for individuals
  • Higher productivity and standard of living for society, less unemployment, improved household mobility, higher political participation
• External benefits of healthcare

  • Personal health improves
  • Healthier people work more effectively contributing to economic output and taxes for the government
• External benefits of vaccinations

  • Protection against infectious disease
  • Possibility of others being infected is lower
• Social benefits


  Private benefits + External benefits (positive externalities)
• Government policies to deal with externalities

  • Taxation
  • Subsidies
  • Fines
  • Regulation
  • Pollution permits
• Taxation


  (i) Reduce external costs of production (ii) Reduce external costs of consumption
• Subsidies


  (i) Incentive to reduce external costs (ii) Encourage firms or activities that generate external benefits
• Fines


  Reduce external costs - fines on those who damage the environment to reduce pollution
• Government regulation


  Pressure on government to protect the environment due to global warming - regulations to reduce external costs of production - social responsibility
• Pollution permits


  Issued document that gives a business the right to discharge a certain quantity of a polluting material into the environment - tradable