Introduction to Economics Unit 7

negative externalities

when the impact on the bystanders is adverse

negative production externalities

noise, inadequate safety measures, deforestation

the marginal cost of production doesn’t take into the account the other costs because its not the products that get affected

negative consumption externalities

heating/travelling → Co2, plastic bags → waste

markets failure

when firms don’t maximize gains from trade

market failure in presence of negative externalities

cost of producing the good for the society + direct production cost

the optimum = social cost with the demand

(new disturbed “equilibrium”)

the equilibrium = supply with the demand

solutions to market failure in presence of negative externalities

• private, coesian barganing

  • government interventions (regulation, taxation)

positive externalities

when the impact on the bystanders is beneficial

positive production externalities

beekeeper’s bees pollinating nearby, Research & Design

positive consumption externalities examples

vaccination, education, security systems

market failure in presence of positive externalities

the social benefit is higher than the private profit

consumers don’t take into account these other benefits

the optimum = social benefits with the supply

(new disturbed “equilibrium”)

the equilibrium = supply with the demand

solutions to market failure in presence of positive externalities

• subsidies → it would not create DWL

• patents → firms enjoying monopoly → more profit