Negative Externalities

Private Markets

such as the cellphone industry offers an efficient way to put buyers and sellers together and determine what goods they produce, how they produce, and who gets them

Externality

the effect of a market exchange on a third party who is “outside” to the exchange is called externality

Spillovers

Because externalities that occur in market transactions affect other parties beyond those involved

Negative Externality EX

If you hate country music, then having it waft into your house every night would a downside

Positive Externality EX

If you love country music, then what amounts to a series of free concerts would be a benefit

Social Costs

is the production with a demand and supply diagram. They include the private costs of production that a company incurs and the external costs of pollution that pass on to society

Demand Curve

shows the quantity demanded at each price

Supply Curve

shows the quantity of refrigerators that all firms in the industry supply at each price assuming they are only taking only their private costs into acount and are allowed to emit pollution at 0 cost

Additional External Costs

is when production becomes more costly and the entire supply curve shifts up

Step #1

Determine the negative externality in this situation. You must think about and consider all parties that might be impacted. A negative externality might be the increase in noise pollution

Step 2

Identify the initial equilibrium price & quantity only taking private costs into account. Next, identify the new equilibrium taking into account the social and private costs

Equilibrium

is where the quantity demanded is equal to the quantity supplied

Step 3

Look down the columns to where the QD is equal to the QS without paying the costs of externality. Then refer to the first column of that row which determines the EQ.

Step 4

Identify the EQ & quantity when we take into account the additional costs. Look down the columns of QD and the QS after paying the costs of externality

Step 5

Consider how taking into account the externality affects the EQ & quantity. Do this by comparing the 2 Equilibrium situations. If the firms is forced to pay its additional external costs, then production becomes more costly, and the supply curve will shift up.

Supply Curve

is based on choices about production that firms make while looking at their marginal costs

Demand Curve

is based on the benefits that individuals perceive while maximizing utility.

Market Failure

the private market fails to achieve efficient output, because either firms don’t account for all costs incurred in the production of output/ and or consumers don’t account for all benefits obtained (positive externality)