Econ 1101 1st Edition Lecture 14 Outline of Last Lecture I. Price Ceilings a. RationingII. Cap and TradeOutline of Current Lecture II. Positive and Negative ExternalitiesIII. Graphically Depicting ExternalitiesCurrent LectureAn externality arises when a person engages in an activity that influence the well-being of a bystander and yet neither pays nor receives any compensation for the effect.example: smelling cookies or a fartNegative Externalities:Cigarette smoking (second hand smoke)Driving cars (Global warming from carbon and congestion on roads)Noise (planes, cell phones)Stinky TofuPositive Externalities:Maintenance of home exteriorResearch (Can imitate or build off of)Studying hard in Econ 1101 (Private benefit or benefit to friend)Big IdeaSo far we have only talked about private benefits.Private marginal cost (supply) and Private Marginal Benefit (demand)Externalities are the social benefits or cost Social Marginal cost and Social Marginal BenefitThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.When no externalities only buyers and sellers are affected.With negative and positive externalities everyone is affected.When no externalities:Social Marginal Cost (SMC) = Private Marginal Cost (PMC) aka the supply curve when there is nonegative externalitiesSocial Marginal Benefit (SMB) = Private Marginal Benefit (PMB) aka the demand curve when there is no positive externalities.When externalities:SMC = PMC + External Cost per Unit (EC)SMB = PMB + External Benefit per Unit (EB)Back to First Welfare TheoremFree market q is where PMB=PMCSocially (Pareto) Efficient quantity is where SMB=SMCWhen EC=0 and EB=0 (These are the same thing)Subsidize if there are positive externalities to increase quantity. Q(free market) = Q(socially efficient) = First Welfare Theorem!EXAMPLE:Stinky Tofu society wants less because it smells but free market doesn’t see that EC is too big (EC>0) so it is NOT efficient. Cookies society wants more because they smell good but free market doesn’t see that EB is too big (EB>0) so it is not efficient. The output of cookies is too small. Externalities is NOT a shift in the supply or demand curve.Markets DO NOT see externalities because they are a social
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