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when do externalities exist
when there is a divergence between private and social costs/benefits
MSB =
MPB + MEB
MSC =
MPC + MEC
if it is a production externality there are 2
cost curves
if it is a consumption externality then there are 2
benefit curves
if MEB is negative
negative consumption externality
if MEB is positive
positive consumption externality
If MEC is negative
positive production externality
if MEC is positive
negative production externality
the triangle of deadweight loss always
points to the socially oprtimum point of production
why are negative/positive externalities likely to result in over/under production?
only private costs are considered in economic descision making (homoeconomicus)
why the absence of property rights leads to externalities in consumption and production
An absence of boundaries allows free-riders uncontrolled access, which can result in the over-exploitation or misuse of the resource (tragedy of commons).
The moral hazard assumes someone else will pay the consequences for a poor choice. For example, some people might litter the street if they think that other people will clear up after them.
