Econ 201 1st Edition Lecture 14I. Externalities An externality is a benefit or cost by a non-market participant from another’s consumption or production behaviors.EX: pollution, second-hand smoke, etc. A.) Negative Consumption Externality- A negative consumption externality occurs when private consumption behavior imposescosts on other individuals -- Anytime there is an externality, generate some DWL- Even if negative externalities doesn’t mean that socially optimal level of output = 0- Can have a negative benefit = net cost- With negative externalities the market will over provide a good B.) Positive consumption ExternalityThese 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.-- Vaccinations: child in daycare on campus and students living in dorms work there; Sly receives benefit from students getting the meningitis B vaccine because his child is safer - Private benefit plus some - With positive externality markets will under provide a good C.) Negative Production Externality -D.) Positive Production Externalities - Have to study it on your own (he didn’t go over examples)E.) Solutions to Externalities1. Coase Theorem a. By assigning effective, enforceable property rights over goods/markets with externalities, the socially optimal level of output can be negotiated/reached. 2. Taxes/Subsidiesa. Levy a tax (or offer a subsidy) exactly equal to the value of the negative (positive)externality. 3. Organized market – Government
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