The market for Aluminum and Welfare economics 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 H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Market for Aluminum and Welfare Economics 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
Po∥ ution and the socia Optimum ■■■ Price of Cost of Social cost Aluminum pollution Supply (private cost) Optimum Equilibrium Demand (private value) 0 MARKET Quantity of optimum Aluminun H arc Inc. items and derived items c ht o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. QMARKET 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 and the social-cost curve determines the optimal output level o The socially optimal output level is less than the market equilibrium quantity H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Negative Externalities in Production The intersection of the demand curve and the social-cost curve determines the optimal output level. uThe socially optimal output level is less than the market equilibrium quantity
Achieving the Socially Optimal Output Internalizing an externality involves altering incentives so that people take into account the external effects of their actions H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Achieving the Socially Optimal Output Internalizing an externality involves altering incentives so that people take into account the external effects of their actions
Achieving the Socially Optimal Output The government can internalize an externality by imposing a tax on the producer to reduce the equilibrium quantity to the socially desirable quantity. H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Achieving the Socially Optimal Output The government can internalize an externality by imposing a tax on the producer to reduce the equilibrium quantity to the socially desirable quantity