12/11/15
Lesson 2: Externalities
Learning Objective: I can define, distinguish between, illustrate, and give examples of positive and negative externalities of production and consumption.
DA: Define and give an example of a public good
DA: Define and give an example of a public good
Externality: Occurs when the production or consumption of a good or service has an effect upon a third party.
If the effect is harmful, then we talk about negative externalities.
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If the effect is beneficial, then we talk about positive externalities.
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Externalities may be split into four types:
- Negative externalities of produciton/external costs
- Positive externalities of production/external benefits
- Negative externalities of cunsumption
- Positive externalities of consumption
Negative externalities of production: Occurs when the production of a good or service creates external costs that are damaging to third parties.
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In a free market this situation will continue because profit maximizing firms will only take into account their private costs of production. Therefore, it is the government's responsibility to rectify the situation.
Tradable emission permits are being used on an international level to attempt to reduce greenhouse gases (GHG).
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Tax:
Problems with Tax:
Ban on polluting firms or restrict their output
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Positive externalities of production/external benefits: Occurs when the production of a good or service creates external benefits that are good for third parties.
A printing firm provides high quality training for employees, cost to the firm. If employees leave the firm there is an external benefit to third parties which are other firms.
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Negative externalities of consumption: Occurs when consumption of a good/service results in a negative externality for third parties.
Ex. Cigarettes, alcohol, cars, and loud music/noise pollution.
Government will act to reduce or eliminate the negative externality:
Ban or make it illegal to smoke:
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Positive externalities of consumption: Certain goods/services which when consumed will provide external benefits to third parties.
Ex. When people consume health care they create a positive externality for society. If people are healthier then they will not pass on illnesses and healthier workforce means the economy will be more productive.
If a government wishes to increase the consumption of services that create positive externalities of consumption, such as health care
Subsidize health care:
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Activity: Identify real world examples of positive/negative consumption externalities and a negative production externality.