CHAPTER+10

=**Externalities **=

Table of Content: 1. Title 2. Intro 3. Content 4. Conclusion 5. Glossary

by Elaine

Externality: the uncompensated impact of one's actions on the well-being of a by stander This chapter we will study about the types of externalities and how they affect the market //Producers and consumers do not realize the external effects of their actions when they decide how much to demand or supply, so the equilibrium fails to maximize the total benefit. //

//Therefore...// Externalities cause markets to distribute resources inefficiently. //**
 * //

NEGATIVE EXTERNALITIES
//Negative externalities // are uncompensated effects that are //harmful // to the society. Pollution is a key example of a negative externality.

//This is how it works // When people produce cars, they do not really take pollution into consideration (they just produce) => However, when considering the //social cost // (the (-) impact on the society AKA bystanders) the producers would think //'ah since producing cars// //pollution, we shouldn't make as many cars'.// => If producers were aware of the (-) externality, they would produce less => The equilibrium quantity is not the actual quantity we would want to produce at. =>The //external cost // makes the actual cost higher than the equilibrium cost. => The point where total benefit is maximized is at the //optimum //, the ideal equilibrium. Source: http://johnleanomics.files.wordpress.com/2009/03/image-thumb1.png?w=428&h=321

Because the society produces at the "fake" equilibrium, the market is //inefficient //* * * //Here's another example! // media type="youtube" key="7jdvnSm48nY" height="340" width="560" Source: http://www.youtube.com/watch?v=7jdvnSm48nY&feature=related
 * * *As we can see, the market equilibrium only reflects on the //private cost //, the apparent (-) impact.

//In the video, they mention the Coase Theorem, statement saying that if parties can bargain without any cost, they can happily solve the problem on their own. :)// <span style="color: #f4e834; font-family: 'Times New Roman',Times,serif; font-size: 120%;"> //<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">Another way of dealing with <span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">negative externality <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;"> is by <span style="color: #f4e834; font-family: 'Times New Roman',Times,serif; font-size: 120%;">internalizing the externality <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">, giving people incentives so that they'd take take external effects into consideration. We will talk more about this later... //<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">

<span style="color: #de59d2; font-family: 'Comic Sans MS',cursive; font-size: 150%;"> **POSITIVE EXTERNALITIES**
//<span style="color: #1948f0; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Positive externalities // are unintended effects that are //<span style="color: #1948f0; font-family: 'Times New Roman',Times,serif; font-size: 120%;">beneficial // to the society. <span style="color: #46d317; font-family: 'Times New Roman',Times,serif; font-size: 130%;">Education is a good example when talking about of a positive externality

//<span style="color: #ff8900; font-family: 'Times New Roman',Times,serif; font-size: 140%;">This is how it works // When people get education services, they do not think <span style="font-family: Arial,Helvetica,sans-serif;">//'ah by getting education, crime rate of the society is decreasing' or 'this will help population control'//. (They just get educated) => However, when considering the//<span style="color: #ef2a67; font-family: 'Times New Roman',Times,serif; font-size: 120%;"> social value // (the unintended (+) effect on the bystanders), demanders would think //'ah since education has all these external benefits to the society, we should get more education service!'// => If demanders were aware of the (+) effect, they would value education more => //<span style="color: #ef2a67; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Demand // in education //<span style="color: #ef2a67; font-family: 'Times New Roman',Times,serif; font-size: 120%;">increases // => The equilibrium shown is not the actual equilibrium that maximizes the benefit => The //<span style="color: #ef2a67; font-family: 'Times New Roman',Times,serif; font-size: 120%;">external benefit // makes the actual value of education increase => The //<span style="color: #800080; font-family: 'Times New Roman',Times,serif; font-size: 120%;">optimum // is the actual point where total benefit is maximized

Source: http://johnleanomics.files.wordpress.com/2009/03/image1.png

Because the society demands at the "fake" equilibrium, the market is //<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 130%;">inefficient //* * *
 * * *As we can see, the market equilibrium only reflects on the //<span style="color: #800080; font-family: 'Times New Roman',Times,serif; font-size: 120%;">private value //, the apparent (-) impact.

__SUMMARY__
 * //<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Negative externalities // makes markets produce a //<span style="color: #ff8900; font-family: 'Times New Roman',Times,serif; font-size: 120%;">larger // quantity than is socially desirable.
 * //<span style="color: #1948f0; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Positive externalities // make markets produce a //<span style="color: #ff8900; font-family: 'Times New Roman',Times,serif; font-size: 120%;">smaller // quantity than is socially desirable.

.... //<span style="font-family: 'Times New Roman',Times,serif; font-size: 110%;">To fix these (+) and (-) externalities, the government can internalize the externality by <span style="color: #de59d2; font-family: 'Times New Roman',Times,serif; font-size: 132%;">taxing goods <span style="font-family: 'Times New Roman',Times,serif; font-size: 110%;"> with (-) ext. and <span style="color: #de59d2; font-family: 'Times New Roman',Times,serif; font-size: 132%;">subsidizing goods <span style="font-family: 'Times New Roman',Times,serif; font-size: 110%;"> with (+) ext. // ....

<span style="color: #34f49a; font-family: 'Comic Sans MS',cursive; font-size: 150%;"> PRIVATE SOLUTIONS TO EXTERNALITIES
Remember this? <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;"><span style="color: #000000; font-family: 'Times New Roman',Times,serif;">//In the video, they mention the Coase Theorem, statement saying that if parties can bargain without any cost, they can happily solve the problem on their own. :)// <span style="color: #f4e834; font-family: 'Times New Roman',Times,serif; font-size: 120%;"> ... Well, Coase Theorem is a type of private solution.
 * Parties can bargain with each other and solve the problem. <= <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">// PRIVATELY SOLVING THE ISSUE, (X) INVOLVEMENT OF OTHER PARTIES //

//<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">HOWEVER private solutions do not always work because 1. if there are too many parties, it is hard to come up with a consensus. 2. neither party would want to pay the <span style="color: #3e66f4; font-family: 'Times New Roman',Times,serif; font-size: 120%;">transaction cost <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">, cost that parties need to pay in the process of bargaining. //

So... the //<span style="color: #f4e834; font-family: 'Times New Roman',Times,serif; font-size: 120%;">government // steps in!

<span style="color: #fe241b; font-family: 'Comic Sans MS',cursive; font-size: 150%;">PUBLIC POLICIES TOWARD EXTERNALITIES
//<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Command-and-Control Policies <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;"> (aka Regulations): Regulate behavior direactly // //<span style="color: #fe241b; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Market-Based Policy <span style="color: #000000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">: Corrective Taxes and Subsidies //
 * Government prohibits or requires a certain behavior
 * i.e. The government can prohibit all polluting activities or require every citizen to get a college degree
 * //<span style="color: #800080; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Corrective Taxes //: tax imposed to give producers an incentive to consider the social costs from the //<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">negative externality //.
 * i.e. The government can tax on every factory that emit a certain amount of carbon dioxide.
 * //<span style="color: #800080; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Subsidies //: money or service given by the government to give consumers an incentive to consider the social value from the //<span style="color: #3e66f4; font-family: 'Times New Roman',Times,serif; font-size: 120%;">positive externality //.
 * i.e. The government can subsidize public libraries by giving them extra money to make the facility better.

<span style="color: #ff8900; font-family: 'Comic Sans MS',cursive; font-size: 140%;"> CONCLUSION
__Positive and Negative Externalities__ media type="youtube" key="htbmiYviFjY" height="344" width="425" Source: http://www.youtube.com/watch?v=htbmiYviFjY

<span style="color: #c0c0c0; font-family: 'Comic Sans MS',cursive; font-size: 140%;">__Glossary__ Externality- the unintended effect of one's action on bystanders Internalizing the externality- giving incentives to the people so that they'd consider the external effects Coase Theorem- proposition that parties can privately solve externalities by bargaining with each other Transaction Costs- the costs parties need to pay in the process of bargaining Corrective Tax- tax that gives parties an incentive to amount social costs of negative externalities