Chapter 7_Externalities
Page 1: Introduction
Title: Principles in Economics Chapter 7: Externalities
Author: Prof. Dr. Markus Fredebeul-Krein
Institution: Faculty of Business Studies, Aachen University of Applied Sciences
Page 2: Learning Objectives
Understand what an externality is.
Comprehend why externalities can lead to inefficient market outcomes.
Identify how individuals can sometimes resolve externality problems independently.
Realize the limitations of private solutions to externalities.
Examine various governmental policies aimed at addressing externalities.
Acknowledge that not all government interventions are effective.
Page 3: Chapter Content Outline
2.1. Externalities
Private Solutions to Externalities
Government Solutions to Externalities
Public Goods
Common Pool Resource Goods
Page 4: Externalities
Concept of a "Broken" Invisible Hand due to Negative Externalities
Case Study: We Make Sweaters, Inc.
Page 5: Visualizing Externalities
Diagram: Free yarn, Free workers
Elements: P, Q, p*, q**, Demand (Nachfrage), Supply (Angebot)
Description of negative consequences when firms avoid costs.
Page 6: Continuation of Negative Externalities
Further exploration on the impacts of negative externalities.
Page 7: Socially Optimal Quantity and Price
Discussion on the price and quantity of electricity in relation to social optimization.
Page 8: Deadweight Loss
Explanation of deadweight loss resulting from negative externalities.
Page 9: Definitions of Externalities
Positive Externality: Benefits conferred upon a third party by a decision.
Negative Externality: Costs incurred by a third party due to a decision.
Definition of Externality: Uncompensated impacts of individual actions on bystanders' welfare.
Page 10: Examples of Negative Externalities
Encouragement to generate examples of pollution affecting sensory experiences (ears, eyes, nose).
Page 11: Flu Vaccination Example
Query about flu shot participation, illustrating public health externalities.
Page 12: Benefits of Positive Externalities
Social benefits of education, such as:
Higher individual wages leading to greater tax revenues.
Reduced dependence on social programs.
Lower crime rates.
Increased innovation.
Enhanced societal functioning.
Page 13: Market Equilibrium for Education
Diagrams or concepts illustrating equilibrium in the education sector.
Page 14: Deadweight Loss of Positive Externality
Visualization and explanation related to the inefficiencies of positive externalities.
Page 15: Addressing Inefficiencies
Methods to tackle inefficiencies caused by externalities:
Private solutions.
Government solutions.
Page 16: Private Solutions to Externalities
Example of bargaining without filters (profit analysis of individuals Charles and Luise).
Discussion on the range of acceptable bargaining terms.
Page 17: The Coase Theorem
Coase Theorem: States that private negotiations lead to efficient resource allocation when bargaining costs are minimal.
Page 18: Coase Theorem in Practice
Scenario: Sarah's barking dog annoys neighbor Peter, showcasing bargaining over external effects.
Emphasizes potential failure of private negotiations.
Page 19: Continuing with Coase Theorem
Further questions on Coase Theorem applicability among different parties.
Page 20: The Ethical Dimension
Rhetorical question about motivations for recycling.
Page 21: Public Policy Responses
Context: What happens when private solutions fail?
Overview of government solutions:
Command-and-Control regulation.
Market-based incentives.
Page 22: Command-and-Control Policies
Government regulation aimed at optimizing social outcomes, contextualized with diagrams on electricity prices.
Page 23: User Participation and Regulations
Inquiry about optional catalytic converters on cars to illustrate public behavior under regulation.
Page 24: Corrective Taxes and Subsidies
Insights into the effects of Pigouvian tax on power plants and social costs.
Page 25: Pigouvian Tax Definition
Definition: The tax necessary to achieve socially optimal output levels.
Page 26: Supply and Demand Interactions
Visual representation of how taxation affects supply and demand curves.
Page 27: Pigouvian Tax vs. Tradable Pollution Permits
Differences between setting price limits with Pigouvian taxes and controlling pollution quantities via permits.
Page 28: Tax Applicability
Mention of how Pigouvian taxes also affect individual behaviors.
Page 29: Effect of Subsidies in Education Market
Visual representation of how subsidies influence education market dynamics.
Page 30: Summary
Key Points:
Definition of externality in terms of uncompensated external impacts.
Negative externalities create social inefficiencies due to sub-optimal market quantities.
Positive externalities lead to social benefits exceeding market quantities.
Individuals can negotiate solutions under conditions of low bargaining costs per the Coase theorem.
Page 31: Government Interventions
Summary of when government interventions are required due to failure of private resolutions.
Description of public policies like tax schemes and pollution permits to mitigate externalities while noting potential failures in these interventions.
Page 32: Contact Information
Prof Dr. Markus Fredebeul-Krein
AACHEN UNIVERSITY OF APPLIED SCIENCES
Contact details and location.