Externalities Chapter 10
Externalities Chapter 10
Market Efficiency-Market Failure Recall that: Adam snmith's invisible hand of the marketplace leads self-interested buyers and sellers in a market to maximize the total benefit that society can derive from a market But market failures can still happen o Market failure results from market power and externality
Market Efficiency-Market Failure • Recall that: Adam Smith’s “invisible hand” of the marketplace leads self-interested buyers and sellers in a market to maximize the total benefit that society can derive from a market. • But market failures can still happen. • Market failure results from market power and externality
Market failures: Externalities When a market outcome affects parties other than the buyers and sellers in the market Side-effects are created called externalities o Externalities cause markets to be inefficient and thus fail to maximize total surplus o when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect, an externality arises
Market Failures: Externalities • When a market outcome affects parties other than the buyers and sellers in the market, side-effects are created called externalities. • Externalities cause markets to be inefficient, and thus fail to maximize total surplus. • when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect, an externality arises
Market failures: Externalities o When the impact on the bystander is adverse, the externality is called a negative externality. When the impact on the bystander is beneficial, the externality is called a positive externalit ity
• When the impact on the bystander is adverse, the externality is called a negative externality. • When the impact on the bystander is beneficial, the externality is called a positive externality. Market Failures: Externalities
Examples of Negative externalities ● utomobile exhaust ° Cigarette smoking Barking dogs (loud pets o Loud stereos in an apartment building
Examples of Negative Externalities • Automobile exhaust • Cigarette smoking • Barking dogs (loud pets) • Loud stereos in an apartment building