ECO2030 1st Edition Lecture 23 Outline of Last Lecture I International Trade Outline of Current Lecture II Arguments against international trade III Negative Externalities IV Positive Externalities Current Lecture Review Arguments against international trade job argument is not a good argument for not trading National security argument is better Infant industry argument debated many economists say that if you make a good product you will sell also giving short term protection often stays longer than it should once in place it is hard to remove protection hurts economy Unfair competition argument Says free trade is desirable only if all countries play by the same rules Can threat to bad trade if a country does not play by the rules Problem the threat may not work Externalities A Market Failure The uncompensated impact of the persons actions on a bystander 3rd party Negative externality when the impact is adverse negative the cost to society of producing a good Pollution Best example Positive externality When impact on the bystander is beneficial Vaccines when neighbor invests in landscape education benefits society Market equilibrium Inefficient allocation of resources when buyers and sellers neglect the external costs of consumption and supply This neglect fails to maximize the total benefit to society When there is a negative externality there is a market failure and therefore a role for government These 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 government can protect the interests of the bystanders due to the negative externality Welfare economics recall that the efficient equilibrium price was the intersection of the demand and supply curves because this maximizes the producer and consumer surplus however with a negative externality this equilibrium is not efficient Social Cost total costs Private external costs The social Cost curve is always above the supply curve in the case of a negative externality Can think of it as a leftward shift in the supply curve higher input costs The Optimum quantity maximizes total welfare by eliminating the external cost This is called Internalizing the externality It is how Government can address market failures due to externalities by changing incentives policies taxes etc so that people firms account for the externality Positive externalities external benefit represented by the social value curve Social Value curve Private value External Benefit Social Value curve is above the demand curve For positive externalities the optimum quantity is greater than the market equilibrium Government can correct the market failure by internalizing the externality e g Subsidize it P Optim um External Cost Social Cost Private Supply External Cost Private Cost Equilibriu m Q Optimum Q Market P External Benefit Opti mum Equilibri um Demand Private Value Q Supply Private Cost Social Value Private Value External Demand Benefit Private Q Q Market Value Q Optimum
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