This Slide explain about externalities that related with economic and environment. this slide divided into three part. this is the First Part.

1. ExternalitiesExternalities
Part IPart I

2. • Learn the nature of an externality.
• See why externalities can make market
outcomes inefficient.
• Examine how people can sometimes solve
the problem of externalities on their own.
• Consider why private solutions to
externalities sometimes do not work.
• Examine the various government policies
aimed at solving the problem of
externalities.
• Learn the nature of an externality.
• See why externalities can make market
outcomes inefficient.
• Examine how people can sometimes solve
the problem of externalities on their own.
• Consider why private solutions to
externalities sometimes do not work.
• Examine the various government policies
aimed at solving the problem of
externalities.
In this Topic you will…In this Topic you will…

3. • Recall: Adam Smith’s “invisible
hand” of the marketplace leads self-
interested buyers and sellers in a
market to maximize the total benefit
that society can derive from a
market.
But market failures can still
happen!
• Recall: Adam Smith’s “invisible
hand” of the marketplace leads self-
interested buyers and sellers in a
market to maximize the total benefit
that society can derive from a
market.
But market failures can still
happen!
EXTERNALITIESEXTERNALITIES

4. • If a market system affects
individuals other than buyers
and sellers of that market, side-
effects are created called
Externalities.
– Externalities cause markets to
be inefficient, and thus fail.
• If a market system affects
individuals other than buyers
and sellers of that market, side-
effects are created called
Externalities.
– Externalities cause markets to
be inefficient, and thus fail.
EXTERNALITIESEXTERNALITIES

5. • An externality refers to the
uncompensated impact of one
person’s actions on the well-being of
a bystander.
• Externalities cause markets to be
inefficient, and thus fail to maximize
total surplus.
• An externality refers to the
uncompensated impact of one
person’s actions on the well-being of
a bystander.
• Externalities cause markets to be
inefficient, and thus fail to maximize
total surplus.
EXTERNALITIESEXTERNALITIES

6. • In the presence of externalities,
society’s interest in a market
outcome extends beyond the well-
being of buyers and sellers in the
market. . .
• … the well-being of third parties are
considered.
• In the presence of externalities,
society’s interest in a market
outcome extends beyond the well-
being of buyers and sellers in the
market. . .
• … the well-being of third parties are
considered.
EXTERNALITIESEXTERNALITIES

7. • Positive Externality
• The uncompensated benefits that are
received by individuals who are not
directly involved in the production or
consumption of goods.
• The act of producing or consuming
goods sometimes generates benefits to
others who do not have to pay for them.
• Positive Externality
• The uncompensated benefits that are
received by individuals who are not
directly involved in the production or
consumption of goods.
• The act of producing or consuming
goods sometimes generates benefits to
others who do not have to pay for them.
EXTERNALITIESEXTERNALITIES

8. • Negative Externality
• The uncompensated costs that are
imposed upon individuals who are not
directly involved in the production or
consumption of goods.
• The act of producing or consuming
goods sometimes generates costs to
others who are not paid to endure them.
• Negative Externality
• The uncompensated costs that are
imposed upon individuals who are not
directly involved in the production or
consumption of goods.
• The act of producing or consuming
goods sometimes generates costs to
others who are not paid to endure them.
EXTERNALITIESEXTERNALITIES

9. Negative Externality
• Automobile exhaust
• Cigarette smoking
Positive Externality
• Immunizations
• Restored historic buildings
Negative Externality
• Automobile exhaust
• Cigarette smoking
Positive Externality
• Immunizations
• Restored historic buildings
EXTERNALITIESEXTERNALITIES

10. • The Market for Aluminum
– The demand curve for aluminum
reflects the value to consumers of
aluminum as measured by the prices
they are willing to pay.
– The supply curve for aluminum reflects
the costs of producing aluminum.
– Qmarket: the quantity produced and
consumed in the market equilibrium is
efficient in the sense that it maximizes
the sum of producer and consumer
surplus.
• The Market for Aluminum
– The demand curve for aluminum
reflects the value to consumers of
aluminum as measured by the prices
they are willing to pay.
– The supply curve for aluminum reflects
the costs of producing aluminum.
– Qmarket: the quantity produced and
consumed in the market equilibrium is
efficient in the sense that it maximizes
the sum of producer and consumer
surplus.
Welfare Economics: A RecapWelfare Economics: A Recap

11. Demand
(private value)
Supply
(private costs)
0
Equilibrium
Qmarket
Quantity of
Aluminium
Price of
Aluminium
Figure 10-1: The Market for AluminiumFigure 10-1: The Market for Aluminium

12. • The Market for Aluminum (cont’d)
–If the aluminum factories emit
pollution (a negative externality),
then the cost to society of
producing aluminum is larger than
the cost to aluminum producers.
• The Market for Aluminum (cont’d)
–If the aluminum factories emit
pollution (a negative externality),
then the cost to society of
producing aluminum is larger than
the cost to aluminum producers.
Welfare Economics: A RecapWelfare Economics: A Recap

13. • The Market for Aluminum (cont’d)
– For each unit of aluminum produced,
the social cost includes the private
costs of the producers plus the cost to
those bystanders adversely affected by
the pollution.
• The Market for Aluminum (cont’d)
– For each unit of aluminum produced,
the social cost includes the private
costs of the producers plus the cost to
those bystanders adversely affected by
the pollution.
Negative Externalities inNegative Externalities in
ProductionProduction