Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 5: Problem 3

What is economic efficiency? How do externalities affect the economic efficiency of a market equilibrium?

Short Answer

Expert verified
Economic efficiency occurs when resources are allotted to maximize social welfare with minimal waste. Externalities, being costs or benefits incurred by individuals not directly involved in a transaction, disrupt this economic efficiency. A negative externality leads to overproduction while a positive externality leads to underproduction, thus impeding the achievement of economic efficiency.

Step by step solution

01

Define Economic Efficiency

Economic efficiency is a state where every resource is optimally allocated to serve each individual or entity in the best way while minimizing waste and inefficiency. In such a scenario, the welfare of individuals is maximized given the resources' scarcity.
02

Define Externalities

Externalities are economic side effects. They are costs or benefits that affect someone who did not choose to incur that cost or benefit. They can be categorized as either positive externalities (beneficial effects on third parties) or negative externalities (harmful effects on third parties).
03

Explain the effect of externalities on economic efficiency

Externalities disrupt market equilibrium and prevent economic efficiency from being achieved. When a negative externality is present, the cost to society is more than the cost consumers pay for the good or service - hence, the market produces more of the good than is economically efficient. For a positive externality, the market produces less of the good than is economically efficient because the benefit to society is greater than the profit obtained by producers.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

If the marginal cost of reducing a certain type of pollution is zero, should all of that type of pollution be eliminated? Briefly explain.

In discussing the reduction of air pollution in the developing world, Richard Fuller of the Blacksmith Institute, an environmental organization, observed, "It's the \(90 / 10\) rule. To do 90 percent of the work only costs 10 percent of the money. It's the last 10 percent of the cleanup that costs 90 percent of the money." Why should it be any more costly to clean up the last 10 percent of polluted air than to clean up the first 90 percent? What trade-offs would be involved in cleaning up the final 10 percent? Source: Tiffany M. Luck, "The World's Dirtiest Cities," Forbes, February 26,2008 .

(Related to the Apply the Concept on page 163) An economist for the Brookings Institution argued that "a price on carbon would minimize the cost of steering economic activity away from the greenhouse gas emissions that threaten the climate." a. In what sense does a carbon tax put a price on carbon? b. How would a carbon tax steer economic activity away from greenhouse gas emissions? c. Why might a carbon tax be less costly to the economy than a command-and- control approach to reducinggreenhouse gases? Why might a command-and-control approach to pollution control still be more politically popular than a carbon tax? Include in your answer a brief discussion of the difference between the normative analysis and positive analysis of this policy issue.

In recent years, companies have used fracking, or hydraulic fracturing, in drilling for oil and natural gas that previously could not be profitably recovered. According to an article in the New York Times, "horizontal drilling has enabled engineers to inject millions of gallons of high-pressure water directly into layers of shale to create the fractures that release the gas. Chemicals added to the water dissolve minerals, kill bacteria that might plug up the well, and insert sand to prop open the fractures." Experts are divided about whether fracking results in significant pollution, but some people worry that chemicals used in fracking might lead to pollution of underground supplies of water used by households and farms. a. First, assume that fracking causes no significant pollution. Use a demand and supply graph to show the effect of fracking on the market for natural gas. b. Now assume that fracking does result in pollution. On your graph from part (a), show the effect of fracking. Be sure to carefully label all curves and all equilibrium points. c. In your graph in part (b), what has happened to the efficient level of output and the efficient price in the market for natural gas compared with the situation before fracking? Can you be certain that the efficient level of output and the efficient price have risen or fallen as a result of fracking? Briefly explain.

When does the private cost of producing a good differ from the social cost? Give an example. When does the private benefit from consuming a good differ from the social benefit? Give an example.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free