Externalities

1. Microeconomics
Externalities

2. Externality

3. Externality
Benefits or Costs
to someone else
- Third Party-
Positive or Negative

4. Private Social
Benefits
Costs
Personalize the benefit
Social the cost

5. Market Failure

6. Market Failure
Markets don’t always
produce the most
desirable economic
outcomes

7. Negative Externality

8. Negative Externality
Pollution
Second-Hand Smoke
Litter
Congestion
Boom Cars

13. Positive Externality

14. Positive Externality
Trust
Ideas
Improvements

16. Negative Externality

17. Negative Externality
Too much of the good is
produced because
someone else is paying
part of the costs

18. Positive Externality

19. Positive Externality
Too little of the good is
produced because
producer doesn’t receive
all the benefits

20. Government
Intervention

21. Government
Intervention
Subsidize Positives
Tax and Regulate
Negatives

22. Government Regulation

23. Government Regulation
Command and Control
Incentive-Based
Optimal level of pollution?
Coupons to pollute

24. Parking
Command and Control
Incentive-Based
http://glpooley.blogspot.com/2010/12/incentives-
matter-speed-camera-lottery.html

25. $
Cost
0% 50% 100%
The cost to make things perfectly pure is infinite.
Therefore there is an optimal amount of cleanliness
where marginal benefits equal marginal costs.

26. Externalities
& Market Failures

27. Externalities
& Market Failures
Lack of Property Rights

28. Property Rights
reduce
contention

29. Transaction Costs

30. Transaction Costs
Costs in time and
resources to negotiate and
enforce an agreement

31. Coase Theorem

32. Coase Theorem
Solve contention
with property rights
if transaction costs
are low