Market transactions frequently affect people who are NOT part of the transaction. These effects are called "externalities." Externalities occur when market transactions affect people who are EXTERNAL to the transaction.

Externalities can be positive or negative.

Externalities can occur in production or in consumption.

Production Externality

[There is a divergence between the SUPPLY curve (which represents private costs) and the social cost curve.]

Consumption Externality

[There is a divergence between the DEMAND curve (which represents private benefits or value) and the social benefits curve.]

Negative Externality

(One of the social curves is to the LEFT of the private curve.)

The production of a product or service has an unfavorable affect on people who are not part of the transaction.

Example: factory pollution

The consumption of a product or service has an unfavorable affect on people who are not part of the transaction.

Example: aluminum cans littering the highway

Positive Externality

(One of the social curves is to the RIGHT of the private curve.)

The production of a product or service has a favorable affect on people who are not part of the transaction.

Example: the invention of the laser

(The laser has had many applications which were unforseen when the laser was invented.)

The consumption of a product or service has a favorable affect on people who are not part of the transaction.

Example: public education

(Society benefits from having almost everyone able to read and write.)


Externalities occur when market transactions affect people who are not part of the market transaction. (These people are EXTERNAL to the transaction.)

Most economists argue that markets are efficient at allocating resources. Markets are not perfect, however. Sometimes markets gives us results we do not like. Externalities are an example of "market failure" because the market fails to give us the socially desirable result. ("Market failure" is a bit of a misnomer. The market if not failing to work. The market is failing to give us the result desired by society.) Consequently, there may be a role for government to try help achieve a more socially desirable result. Most economists argue that government policies to deal with externalities should try to bring private costs in line with social costs (with production externalities) and bring private benefits in line with social benefits (with consumption externalities).


POLICIES TO CONTROL POLLUTION:

1. Command and Control Regulation -

2. Pollution Taxes -

3. Marketable Permits -

4. Assign Property Rights (Ronald Coase) -


LINKS TO ENVIRONMENTAL ORGANIZATIONS

GOVERNMENT ORGANIZATIONS RELATED TO THE ENVIRONMENT

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