Chapter 5 Externalities and Public Goods

L06

Chapter 5 ? Externalities and Public Goods

The Club

Anti Theft Device Assume you car is parked and has the

club in place.

Does this have an effect on the chance that other cars are stolen? Why?

Externalities

Def: A benefit or cost that affects someone who is not directly involved in the production or consumption of a good.

Example:

Sweaty gym clothes Positive Externality

Purchase of Subway Sandwich

Only two parties benefit, you and Subway No Externality

Purchase of college education

You AND society benefits Less Crime, better health, more informed voters etc...

Positive Externalities

Def: Benefits to third parties other than buyers or sellers not reflected in prices

Examples: Identify the primary parties and the third parties

Fire prevention mechanisms for your apartment Nice Landscaping Education

Externalities

Negative Externality

Producers of electricity Pay to get the coal, build the plant, pay the

workers etc Is that the only cost of electricity consumption

and production? What other costs are there? ____________________________________

____________________________________ Example: Coal Ash spill in Tennessee

December 27, 2008 ? 5.4 million cubic yards Thought question: Is the optimal level of pollution

zero?

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