Transcript NEGATIVE EXTERNALITIES

Negative Externalities
Where the Free Market Needs Help
EXTERNALITIES
• An externality is the
uncompensated impact of one
person’s actions on another person
Efficiency requires:
• All costs of production must be counted by
producers
• If pollution is “not counted” => society bears the
costs of production
This is not efficient
Negative Externalities
– Automobile exhaust
– Cigarette smoking
– Barking dogs (loud pets)
– Loud stereos in an
apartment building
– Noisy Students
– Neighbor’s poorly
maintained property
– Pollution
Positive Externalities
– Restored historic buildings
– Research into new technologies
– Neighbor’s well maintained property
Youtube video—cool examples
MARKET INEFFICIENCY
• Negative externalities lead markets to
overproduce
S2
Price of
Aluminum
Supply
(marginal cost)
Market price
should be here
Equilibrium
Demand
(marginal benefit)
0
Quantity demanded/QMARKET
supplied at the true
price should be here
Quantity of
Aluminum
Specific Examples:
Lake Erie
Before
After Regulation/Clean Up Efforts
Acid Rain
Global Warming
Solutions to Pollution
Increase Government Regulation
a) Tax the pollutant oil carbon, etc.
b) Fine corporations/individuals who pollute
c) Provide incentive to not pollute
Creating an Incentive to Not
Pollute: Cap & Trade System
• Gov’t can create a system of
trading pollution credits
[Read Article if time]
Global Pollution Standards
Questions to consider:
1.Who is in charge of
pollution standards?
2. Should countries all have
the same pollution/
environmental standards?