Externalities Chapter 10 Copyright C 2001 by Harcourt, Inc All rights reserved. Requests for permission to make copies of any part of t work should be mailed to Permissions Department, Harcourt College Publishers 277. Sea Harbor Drive. Orlando Florida 32887-6777 2001 by Harco
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Externalities Chapter 10 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777
Market Efficiency - Market Failures 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 H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Market Efficiency - Market Failures Recall that: Adam Smith’s “invisible hand” of the marketplace leads selfinterested 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 Failures: Externalities e When a market outcome affects parties other than the buyers and sellers in the market side-effects are created called externalities e Externalities cause markets to be inefficient and thus fail to maximize total surplus H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Market Failures: Externalities uWhen a market outcome affects parties other than the buyers and sellers in the market, side-effects are created called externalities. uExternalities cause markets to be inefficient, and thus fail to maximize total surplus
An externality arises 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 H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. An externality arises... . . . 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
Market Failures: Externalities o When the impact on the bystander is adverse, the externality is called a negative externality o When the impact on the bystander is beneficial, the externality is called a positive externality H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Market Failures: Externalities uWhen the impact on the bystander is adverse, the externality is called a negative externality. uWhen the impact on the bystander is beneficial, the externality is called a positive externality