1. This course is prepared under the Erasmus+ KA-210-YOU Project titled
«Skilling Youth for the Next Generation Air Transport Management»
Sustainability
Management in Aviation
The economic perspective – ‘Externalities’ and
environmental policy – Part III
Prof. Dr. Frank Fichert
Worms University of Applied Sciences
2. Why do externalities cause a market failure?
The economic perspective – Part III 2
Externalities
In a market equilibrium, the costs of producing a good or a service are covered by the
prices that buyers are willing to pay. In general, a market equilibrium leads an overall
efficient situation.
However, if there are external costs, the market equilibrium is not an efficient outcome.
3. The economic perspective – Part III 3
Externalities
Due to negative
externalities, the market
equilibrium (p* / q*) is
inefficient.
The price is too low and
the output is too large
(when compared to an
efficient market outcome).
4. How to deal with externalities?
The economic perspective – Part III 4
Externalities
If producers would have to pay for the external damage (‘internalization’), the market
outcome would be efficient.
However, in this case they would also adapt their decisions. This can also be explained with
the help of another economic model.
=> Please continue with video/slides ‘Sust S/V 02-04’
