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Externalities SFLS part1
- 2. Market Failure One type of market failure: Externality, the uncompensated impact of one person’s actions on the well-being of a bystander. Self-interested buyers and sellers neglect the external costs or benefits of their actions on society, so the market outcome is not efficient for everyone. Externalities can be negative or positive, depending on whether impact on bystander is adverse or beneficial. (good or bad)
- 3. Textbook definition: - is a cost or a benefit that arises from: Production that falls on someone other than the producer. Consumption that falls on someone other than the consumer. Shorter definition: - the uncompensated无补偿的 impact of one person’s actions on the well-being of a bystander or third party. Easier definition: - Stuff that affects other people. Externalities
- 4. 1.) Externality Types 2.) The Graphs 3.) Solutions Market Failure - Externalities
- 5. Negative Externalities - Unintended costs. - A production or consumption activity that creates an external cost.Negative consumption Negative production 1.) Externality Types
- 6. Negative consumption Negative production 1.) Externality Types
- 7. Negative consumption Negative production 1.) Externality Types
- 8. Negative consumption Negative production 1.) Externality Types
- 9. Negative consumption Negative production 1.) Externality Types
- 10. Demerit Goods - Goods with negative externalities and considered socially undesirable. 1.) Externality Types
- 11. Positive Externalities Positive consumption Positive production 1.) Externality Types - Unintended benefits. - A production or consumption activity that creates an external benefit.
- 12. Positive consumption Positive production 1.) Externality Types 疫苗
- 13. Positive consumption Positive production 1.) Externality Types
- 14. Positive consumption Positive production 1.) Externality Types
- 15. Positive consumption Positive production 1.) Externality Types
- 16. Positive consumption Positive production 1.) Externality Types
- 17. Merit Goods 1.) Externality Types Goods with positive externalities of which more is desired then would typically be produced.
- 18. 1.) Externality Types 2.) The Graphs Market Failure - Externalities 2.1) Negative 2.2) Positive 3.) Solutions
- 19. Means an additional one, the measurement from one unit to the next. 最后的东西之一 Marginal Benefits VS. Marginal Costs 边际效益 针对 边际成本 (MB) (MC) If MB > MC = It is worth doing 这是值得的 If MB = MC = It may be worth doing “a wash” 收支平衡 If MB < MC = Not worth doing 这是不值得的 Also called Cost/Benefit analysis Marginal Thinking
- 20. – Training your brain to understand value 训练你的大脑明白什么意思值 Marginal Benefit Marginal Thinking The value of one more unit of a good or service is its marginal benefit.can be measured as the maximum price that people are willing to pay for another unit of the good or service. Demand and Marginal Benefit - Buyers distinguish 区别 between value and price. - Value is what the buyer gets. - Price is what the buyer pays.
- 21. If we looked at a larger market with many more buyers, each would be a step on this curve It looks just like a demand curve doesn’t it That’s because it is! D = MB 0 750 1500 2250 3000 3750 4500 5250 6000 0 100200300400500 P Q Demand = Marginal Benefit Remember this?
- 22. Means an additional one, the measurement from one unit to the next. 最后的东西之一 Marginal Benefits VS. Marginal Costs 边际效益 针对 边际成本 (MB) (MC) If MB > MC = It is worth doing 这是值得的 If MB = MC = It may be worth doing “a wash” 收支平衡 If MB < MC = Not worth doing 这是不值得的 Also called Cost/Benefit analysis Marginal Thinking
- 23. Means an additional one, the measurement from one unit to the next. 最后的东西之一 Marginal Social Benefits VS. Marginal Social Costs 边际效益 针对 边际成本 (MB) (MC) If MSB > MSC = It is worth doing 这是值得的 If MSB = MSC = It may be worth doing “a wash” 收支平衡 If MSB < MSC = Not worth doing 这是不值得的 Also called Cost/Benefit analysis Marginal Thinking
- 24. ( MPC ) Marginal Private Cost ( MC ) - The cost of producing an additional unit of a good or service that is borne by the producer of it.*Supply =MC = MPC 2.) The Graphs
- 25. P Q MB P MC = MPC Marginal Costs = Marginal Private Costs EQ MC - Typical market equilibrium that we have studied so far. 2.) The Graphs
- 26. ( MPC ) Marginal Private Cost ( MC ) 2.) The Graphs ( MEC ) Marginal External Cost - The cost of producing an additional unit of a good or service that falls on people other than the producer. *** The more produced the higher the costs.
- 27. P Q MB P MEC Marginal External Costs Negative Externalities - At any given output the external costs to all are higher then the private costs - The more that is produced the higher the costs become EQ External cost MC
- 28. ( MPC ) Marginal Private Cost ( MC ) 2.) The Graphs ( MEC ) Marginal External Cost ( MSC ) Marginal Social Cost + = - The marginal cost incurred by the entire society
- 29. P Q MB MSC Marginal Social Costs MPC + MEC = MSC The marginal cost incurred by the entire society – everyone – the people that produce it and all other third parties affected by it External cost MSC MC 2.) The Graphs
- 30. P Q MB P EQ External cost MSC MC The MPC production point is not efficient from a societal view, too much is produced. MB = MSC is the efficient production point from a societal view. EQ1 P1 2.) The Graphs
- 31. P Q P Deadweight loss occurs for society at MPB. The marginal cost incurred by the entire society – everyone – the people that produce it and all other third parties affected by it EQ MSC MC MB=MPB P1 EQ1 2.) The Graphs
- 32. 0 1 2 3 4 5 0 10 20 30 Q (gallons) P $ The market for gasoline Another Example of a Negative Externality: Supply (private cost) External cost = value of the negative impact on bystanders = $1 per gallon (value of harm from smog, greenhouse gases) Social cost = private + external cost
- 33. 0 1 2 3 4 5 0 10 20 30 Q (gallons) P $ The market for gasoline D S The socially optimal quantity is 20 gallons. At any Q < 20, value of additional gas is higher then social cost. At any Q > 20, social cost of the last gallon is greater than its value to society. 25 Demand Private cost Social Cost Another Example of a Negative Externality:
- 34. 0 1 2 3 4 5 0 10 20 30 Q (gallons) P $ The market for gasoline D S The socially optimal quantity is 20 gallons. At any Q < 20, value of additional gas is higher then social cost. 25 Demand And there is a deadweight loss Private cost Social Cost Another Example of a Negative Externality:
- 35. 0 1 2 3 4 5 0 10 20 30 Q (gallons) P $ The market for gasoline D S The socially optimal quantity is 20 gallons. At any Q > 20, social cost of the last gallon is greater than its value to society. 25 Demand And there is a deadweight loss Private cost Social Cost Another Example of a Negative Externality:
- 36. 1.) Externality Types 2.) The Graphs Market Failure - Externalities 2.1) Negative 2.2) Positive 3.) Solutions
- 37. ( MPB ) Marginal Private Benefits ( MB ) 2.) The Graphs - The benefit of an additional unit of a good or service that the consumer of that good or service receives. *Demand = MB = MPB
- 38. P Q MB P MB = MPB Marginal Benefits = Marginal Private Benefits - Typical market equilibrium that we have studied so far. EQ MC 2.) The Graphs
- 39. ( MPB ) Marginal Private Benefits ( MB ) 2.) The Graphs -The benefit of an additional unit of a good or service that people other than the consumer of the good or service enjoy. ( MEB ) Marginal External Benefit *** The more consumed the benefits diminish.
- 40. P Q P MEB Marginal External Benefits - At any given point the external benefits of society are greater then that of the individual - As more is produced the benefits typically become smaller EQ External benefit MC MB 2.) The Graphs
- 41. ( MPB ) Marginal Private Benefits ( MB ) 2.) The Graphs ( MEB ) Marginal External Benefit - The marginal benefit enjoyed by society. ( MSB ) Marginal Social Benefit + =
- 42. P Q P MSB Marginal Social Benefits - The cost of producing an additional unit of a good or service that falls on people other than the producer. EQ External benefit MC MB MSB MPB + MEB = MSC 2.) The Graphs
- 43. P Q P EQ MC MSB P1 EQ1 MB = MPB The MPB production point is not efficient from a societal view, not enough is produced. MC = MSB is the efficient production point from a societal view. 2.) The Graphs
- 44. P Q P EQ MC MSB P1 EQ1 MB = MPB Deadweight loss occurs for society at MPB. Not enough is produced from the view from society 2.) The Graphs
- 45. Negative Externality - Market quantity larger than socially desirable - Overproduction Positive Externality - Market quantity smaller than socially desirable - Underproduction Next: To remedy the problem: “internalize the externality” 内部化的外部性 tax goods with negative externalities subsidize goods with positive externalities Create government regulation and laws to prevent the problem Effects of Externalities: Summary
- 47. Means an additional one, the measurement from one unit to the next. 最后的东西之一 Marginal Benefits VS. Marginal Costs 边际效益 针对 边际成本 (MB) (MC) If MB > MC = It is worth doing 这是值得的 If MB = MC = It may be worth doing “a wash” 收支平衡 If MB < MC = Not worth doing 这是不值得的 Also called Cost/Benefit analysis Marginal Thinking
- 48. Means an additional one, the measurement from one unit to the next. 最后的东西之一 Marginal Social Benefits VS. Marginal Social Costs 边际效益 针对 边际成本 (MB) (MC) If MSB > MSC = It is worth doing 这是值得的 If MSB = MSC = It may be worth doing “a wash” 收支平衡 If MSB < MSC = Not worth doing 这是不值得的 Also called Cost/Benefit analysis Marginal Thinking
- 49. P Q MB P EQ External cost MSC MC The MPC production point is not efficient from a societal view, too much is produced. MB = MSC is the efficient production point from a societal view. EQ1 P1 2.) The Graphs
- 50. P Q P Deadweight loss occurs for society at MPB. The marginal cost incurred by the entire society – everyone – the people that produce it and all other third parties affected by it EQ MSC MC MB=MPB P1 EQ1 2.) The Graphs
- 51. P Q P EQ MC MSB P1 EQ1 MB = MPB The MPB production point is not efficient from a societal view, not enough is produced. MC = MSB is the efficient production point from a societal view. 2.) The Graphs
- 52. P Q P EQ MC MSB P1 EQ1 MB = MPB Deadweight loss occurs for society at MPB. Not enough is produced from the view from society 2.) The Graphs
- 53. Goods with Externalities Demerit Goods Goods with negative externalities and considered socially undesirable. Merit Goods Goods with positive externalities of which more is desired then would typically be produced.
- 54. The End Thanks!