Lecture 17Outline of Last Lecture I. Arguments Against International Trade Outline of Current Lecture II. Externalities Current LectureExternalities: Reminder that in the absence of market failures, the competitive market outcome is efficient (maximize total surplus)Definition: The uncompensated impact of one person’s actions on the well being of a bystander1. Positive Externality: if the impact on the bystander by the market is beneficiala. Lead markets to produce a smaller quantity than is socially desiredb. Ex. Flu shots, hybrid cars, education, solar energy, usually related to health and the environment2. Negative Externality: if the impact on the bystander by the market is adversea. Lead markets to produce larger quantity than is socially desiredb. Ex. smoking, pollution, driving while textingNegative Externalities- Private cost: A cost paid by consumer or producer- External cost: A cost paid by people other than the consumer and producer trading in the market- Social cost: private + external costs- Social surplus: consumers + producers + everyone else’s surplus- Efficient Equilibrium: price and quantity that maximizes social surplusExample: the market for gasoline- When external costs are significant, the output is too higho Qeff<Qm (costs exceed the private benefits to burgers)o Result: DWL emerges and reduces social surpluso Solution? Maximize social surplus and the output should be reduced Ex. A $1 tax on gallon to sellers would shift the supply curve by $1. Positive externalities- Private value: the direct value to buyers- External benefit: the value of the positive impact on bystanders- Social value: private + external benefit ECON 1 1st EditionExample: Market for flu shots- When external benefits are significant, the output is too lowo Qm<Qeff (total benefits exceed the price benefits to buyers)o A DWL emerges and reduces the social surpluso Solution? To maximize the social surplus, the output should be increased to the socially efficientlevel Ex. Government offers consumers a $10 subsidy per shot subsidy. This would shift the demand curve up by