OU ECON 1123 - Externalities (2 pages)

ECON 1123 Edition 1st Lecture 17 Outline From Previous Lecture Lecture 16 I Monopoly and Economic Efficiency II An extension of the competitive model Externalities A Characteristics of Private goods and public goods B Positive externalities External Benefits C Negative Externalities External Costs Outline Lecture 17 I Private Goods and Public Goods demand schedules II Positive Externalities or external benefits revisited III Negative Externalities or external costs pollution Lecture 17 Notes I Private Goods and Public Goods demand schedules Private goods rival and exclusion of non payers free riders is feasible You use horizontal addition to derive the market society s demand schedule Public goods non rival and exclusion of non payers is difficult and costly II Positive Externalities or external benefits revisited Education is a good that generates a positive external benefits such as better healthcare and overall knowledge When drawing a diagram to show this you will have one supply curve that goes up like it normally would that will be labeled the sum of Marginal Cost from the individual firms Then you will have a private demand schedule drawn just like normal but then to the right of the private demand you draw the external demand curve Where the external demand curve meets the x axis you draw a dotted line up and by vertical summation draw a demand curve on top of private demand that will equal private demand and external demand This will be the demand of society Note External Demand is not taken into account by the market because no one is willing to voluntarily pay for it This demand is revealed by an imprecise political process Q society Q private Market Failure Policies will be put in place to increase Q of education like subsides and regulations 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 III This will make the external demand smaller in your graph so that when you draw your d private you can add d external on top of it and where supply intersects this new d society schedule you will have your private Q equal Q society This is what we are after and this means there will be no market failure Negative Externalities or external costs pollution Pollution generates costs to the environment that are not voluntarily taken into account by the private market Suppose a mixed private good generating external cost or pollution Note Whereas with positive externalities the supply stays the same and we play with the demand now the demand will stay the same and we will play with supply You will draw your downward sloping demand schedule like always then draw two marginal costs schedules the one to the left the sum of marginal costs for firms which gives us our supply curve and to the right the marginal cost for the external which is the pollution Then we draw society s supply which will be the most to the left This is because the supply is higher because it is the sum of the two previously mentioned supply curves Now we will have Q society Qprivate Market failure Note any time Q private and Q society are not equal we have market failure To try to combat this there are policies like taxes and regulations To learn more about externalities when preparing for the exam read our textbook by Stone pages 84 90