Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Chapter 18.a. Externalities and Efficiency Sometimes when producing or consuming a good, harmful or beneficial side effects occur that can affect people beyond those directly involved in the market exchanges. If the side effects are positive they are called external benefits and if they are negative they are called external costs. Immunizations create external benefits, while pollution, congestion, noise, and theft create external costs. Externalities tend to cause an inefficient allocation of resources because market prices do not take external costs and benefits into account. In general, an externality exists when one person’s actions affect another’s well-being and no payment is made. External Costs Suppose a steel mill is polluting the surrounding environment as a byproduct of producing steel. The smoke produces $5 in damages for every ton of steel produced. P social DWL MCsocial $5 MCprivate Ps B Pp private A D Qs Qp steel The MCprivate curve represents the marginal costs for the steel mill, but the damage from pollution must also be considered because it is an extra cost to society. Therefore, the MCsocial curve represents the real costs since it considers all the costs. Moving from the social optimum to the private optimum creates an increase in total benefit (TB) of the area A and an increase in total cost (TC) of A+B. Therefore there is a deadweight loss (DWL) of size B. The cost of moving from the social optimum to the private optimum is greater than the benefit. This means that even though the quantity of steel produced is lower and the price is higher at the point of social equilibrium, it is the preferred economic place to be because no DWL is produced. If no steel were produced and therefore no pollution, society would be poorer by the area under and to the left of the demand curve and above the MCsocial curve. External Benefits In contrast to a steel mill, which produces the external cost of pollution, a flower shop can produce external benefits because people enjoy flowers. Suppose a flower shop produces $5 in benefits from the sale of its flowers. P private DWL (under production) MCprivate $5 external benefit MCsocial Pp BB Ps social A D Qp Qs flowers The MCprivate curve represents the marginal costs for the flower shop only, but the benefit from the flowers must also be considered because flowers are considered beneficial to society. Therefore, the MCsocial curve is lower than the MCprivate curve because the benefits offset some of the costs. Moving from the social optimum to the private optimum creates a decrease in total benefit (TB) of the area A+B and a decrease in total cost (TC) of A. A deadweight loss (DWL) of size B is created because flowers are under-produced at the private optimum. The benefit of moving from the private optimum to the social optimum outweighs the cost. At the social optimum, the quantity of flowers produced is greater and the price is lower, which is good for consumers. Note that total cost should always be evaluated under the MCsocial curve.