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Chapter 12: Problem 14

What is an externality?

Short Answer

Expert verified
An externality is a cost or benefit that affects a third party not directly involved in a transaction or production of a good or service. Positive externalities include education and vaccinations, as they benefit not only the individual but the society as a whole. Negative externalities, such as air and noise pollution, cause harm to those who did not participate in the production or transaction, affecting their health and wellbeing.

Step by step solution

01

Definition

An externality is a cost or benefit that affects a third party not directly involved in a transaction or production of a good or service. Externalities can be both positive and negative, depending on whether the third party experiences a benefit or cost as a result of the transaction or production.
02

Examples of Positive Externalities

1. Education: When an individual gets an education, it not only benefits the person but also provides benefits to the society as a whole. A more educated workforce can lead to increased productivity, innovation, and reduced crime rates. 2. Vaccinations: When people get vaccinated, they not only protect themselves from getting sick but also reduce the chances of others getting infected, creating a healthier community.
03

Examples of Negative Externalities

1. Air pollution: When a factory produces goods, it also generates emissions that pollute the air. This pollution affects those living near the factory who did not participate in the production or purchase of the goods, causing respiratory or other health problems. 2. Noise pollution: When a nightclub or loud event takes place in a residential area, it can cause noise pollution that disturbs the residents who didn't choose to attend the event or live near the nightclub. This disrupts their sleep, affecting their wellbeing and productivity.

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Most popular questions from this chapter

What are the economic tradeoffs between lowincome and high-income countries in international conferences on global environmental damage?

Classify the following pollution-control policies as command-and-control or market incentive based. a. A state emissions tax on the quantity of carbon emitted by each firm. b. The federal government requires domestic auto companies to improve car emissions by 2020 . c. The EPA sets national standards for water quality. d. A city sells permits to firms that allow them to emit a specified quantity of pollution. e. The federal government pays fishermen to preserve salmon.

The rows in Table 12.7 show three market-oriented tools for reducing pollution. The columns of the table show three complaints about command-and- control regulation. Fill in the table by stating briefly how each market- oriented tool addresses each of the three concerns. $$\begin{array}{l|lcc}\hline & \begin{array}{l}\text { Incentives to } \\\\\text { Go Beyond }\end{array} & \begin{array}{c} \text { Flexibility about Where and How } \\\\\text { Pollution Will Be Reduced }\end{array} & \begin{array}{c}\text {Political Process Creates } \\\\\text { Loopholes and Exceptions }\end{array} \\\\\hline \begin{array}{l}\text { Pollution } \\\\\text { Charges }\end{array} & & \\\\\hline \begin{array}{l}\text { Marketable } \\\\\text { Permits }\end{array} & & \\\\\hline\begin{array}{l}\text { Property } \\\\\text { Rights }\end{array} & & \\\\\hline\end{array}$$

Table 12.5 provides the supply and demand conditions for a manufacturing firm. The third column represents a supply curve without accounting for the social cost of pollution. The fourth column represents the supply curve when the firm is required to account for the social cost of pollution. Identify the equilibrium before the social cost of production is included and after the social cost of production is included. $$\begin{array}{l|l|ll}\hline \text { Price } & \begin{array}{l}\text { Quantity } \\\\\text { Demanded }\end{array} &\begin{array}{l}\text { Quantity Supplied without paying } \\\\\text { the cost of the pollution }\end{array} &\begin{array}{c}\text { Quantity Supplied after paying } \\\\\text { the cost of the pollution }\end{array} \\\\\hline \$ 10 &450 & 400 & 250 \\\\\hline \$ 15 & 440 & 440 & 290 \\\\\hline \$ 20 & 430 & 480 & 330 \\\\\hline \$ 25 & 420 & 520 &370 \\\\\hline \$ 30 & 410 & 560 & 410 \\\\\hline\end{array}$$

Would environmentalists favor command-andcontrol policies as a way to reduce pollution? Why or why not?
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