Examples of Positive externalities ● Immunizations o Restored historic buildings o Research into new technologies
• Immunizations • Restored historic buildings • Research into new technologies Examples of Positive Externalities
The market for aluminum ●●● Price of Aluminum Supply (private cost) Equilibrium Demand (private value) 0 Q MARKET Quantity of Aluminum
The Market for Aluminum... Quantity of Aluminum 0 Price of Aluminum QMARKET Demand (private value) Supply (private cost) Equilibrium
The market for aluminum and welfare economics The quantity produced and consumed in the market equilibrium is efficient in the sense that it maximizes the sum of producer and consumer surplus If the aluminum factories emit pollution (a negative externality), then the cost to society of producing aluminum is larger than the cost to aluminum producers For each unit of aluminum produced, the social cost includes the private costs of the producers plus the cost to those bystanders adversely affected by the pollution
The Market for Aluminum and Welfare Economics • The quantity produced and consumed in the market equilibrium is efficient in the sense that it maximizes the sum of producer and consumer surplus. • If the aluminum factories emit pollution (a negative externality), then the cost to society of producing aluminum is larger than the cost to aluminum producers. • For each unit of aluminum produced, the social cost includes the private costs of the producers plus the cost to those bystanders adversely affected by the pollution
Pollution and the social Optimum Price of Cost of Social cost Aluminum pollution Supply (private cost) Optimum Equilibrium Demand private value) 0 Quantity of optimum MARKe Aluminum T
QMARKE T Pollution and the Social Optimum... Quantity of Aluminum 0 Price of Aluminum Demand (private value) Supply (private cost) Social cost Qoptimum Cost of pollution Equilibrium Optimum
Negative Externalities in production The intersection of the demand curve the social-cost curve determines the e and optimal output level The socially optimal output level is less than the market equilibrium quantity
Negative Externalities in Production • The intersection of the demand curve and the social-cost curve determines the optimal output level. • The socially optimal output level is less than the market equilibrium quantity