Deadweight loss from positive externality XB MBPVT + XB Social Demand MBSO C QSO P ric e Private Demand MC QP VT MBP VT Private Social.. Effects of Externalities[r]
(1)Externalities and Property Rights
(2)Learning Objectives
1 Define negative and positive externalities and
analyze their effect on resource allocations
2 Discuss and explain the Coase Theorem
3 Explain how the effects of externalities can be
remedied and discuss why the optimal amount of an externality is almost never zero
4 Illustrate the tragedy of the commons and show
how private ownership is a way of preventing it
5 Define positional externalities and their effects, and
(3)External Costs and Benefits
• An external cost is a cost of an activity that falls
on people other than those who pursue the activity
– Also called a negative externality
• An externality is the name given to an external
cost or external benefit of an activity
• An external benefit is a benefit of an activity
received by people other than those who pursue the activity
(4)Externalities Affect Resource Allocation
• Externalities reduce economic efficiency
– Solutions to externalities may be efficient
– When efficient solutions to externalities are not
(5)• Phoebe harvests and sells honey from her bees
– Bees pollinate the apple orchards
• No payments made to Phoebe
• The bees provide a free service to the local
farmers
– Phoebe is giving away a service
• Private costs are equal to private benefits
– Social costs are less than social benefits
When external benefits exist,
(6)Honeybee Keeper – Scenario 2
• Phoebe harvests and sells honey from her bees • People at a neighboring school and nursing
home are bothered by bee stings
• The bees are a nuisance to the neighbors
– Phoebe is not paying all the costs of her honeybees
• Private costs are equal to private benefits
– Social costs are greater than social benefits
When external costs exist,
(7)External Cost Quantity (tons/year) 12,00 1.3 P ric e ($ 00 0s / to n) D Private MC $1,000/ton External Costs P ric e ($ 00 0s / t on )
No External Cost
Quantity (tons/year)12,000
(8)Positive Externality for Consumers
(9)Effects of Externalities
With externalities,
private market outcomes do not achieve
(10)Remedying Externalities
• With externalities, private market outcomes
not achieve the largest possible economic surplus
– Cash is left on the table
• For example, with monopolies, output is lower
than with prefect competition
– Introduction of coupons and rebates expands the
market
• With externalities, actions to capture the surplus