KHALID AZIZ COMMERCE EXPERT Externalities. KHALID AZIZ COMMERCE EXPERT JOIN KHALID AZIZ ECONOMICS...

KHALID AZIZKHALID AZIZ

COMMERCE EXPERTCOMMERCE EXPERT

ExternalitiesExternalities



JOIN KHALID AZIZJOIN KHALID AZIZ

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.B.COM.

FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.ICAP MODULE B, B.COM, BBA, MBA & PIPFA.

COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.

CONTACT:CONTACT:0322-33857520322-3385752R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,

KARACHI, PAKISTAN.KARACHI, PAKISTAN.



Market Failures: ExternalitiesMarket Failures: Externalities

When a market outcome affects parties When a market outcome affects parties other than the buyers and sellers in the other than the buyers and sellers in the market, side-effects are created called market, side-effects are created called externalities.externalities.

ExternalitiesExternalities cause markets to be cause markets to be inefficient, and thus fail to maximize inefficient, and thus fail to maximize total surplus.total surplus.



An externality arises...An externality arises...

. . . when a person engages in an . . . when a person engages in an activity that influences the well-being activity that influences the well-being of a bystander and yet neither pays of a bystander and yet neither pays nor receives any compensation for nor receives any compensation for that effect.that effect.



Market Failures: ExternalitiesMarket Failures: Externalities

When the impact on the bystander is When the impact on the bystander is adverse, the externality is called a adverse, the externality is called a negative externalitynegative externality..

When the impact on the bystander is When the impact on the bystander is beneficial, the externality is called a beneficial, the externality is called a positive externalitypositive externality..



Automobile exhaustAutomobile exhaust Cigarette smokingCigarette smoking Barking dogs (loud pets)Barking dogs (loud pets) Loud stereos in an apartment Loud stereos in an apartment

buildingbuilding

Examples of Negative ExternalitiesExamples of Negative Externalities



ImmunizationsImmunizations Restored historic buildingsRestored historic buildings Research into new Research into new

technologiestechnologies

Examples of Positive Examples of Positive ExternalitiesExternalities



The Market for Aluminum...The Market for Aluminum...

Quantity ofAluminum

0

Price ofAluminum

QMARKE

T

Demand(private value)

Supply(private cost)

Equilibrium


COMMERCE EXPERTCOMMERCE EXPERTQMARKE

T

Pollution and the Social Pollution and the Social Optimum...Optimum...

Quantity ofAluminum

0

Price ofAluminum



Social cost

Qoptimum

Cost ofpollution

Equilibrium

Optimum



Negative Externalities in Negative Externalities in ProductionProduction

The intersection of the demand curve The intersection of the demand curve and the social-cost curve determines and the social-cost curve determines the optimal output level.the optimal output level.

The socially optimal output level The socially optimal output level is less is less thanthan the market equilibrium quantity. the market equilibrium quantity.



Positive Externalities in Positive Externalities in ProductionProduction

When an externality When an externality benefitsbenefits the the bystanders, a positive externality bystanders, a positive externality exists.exists.

The social costs of production are less The social costs of production are less than the private cost to producers and than the private cost to producers and consumers.consumers.



Positive Externalities in Positive Externalities in Production...Production...

Quantityof Robots

0

Priceof Robot

QOPTIMUM


Supply (private cost)

Social cost

QMARKET

Value oftechnologyspillover

Equilibrium

Optimum



Positive Externalities in ProductionPositive Externalities in Production

The intersection of the demand curve and The intersection of the demand curve and the social-cost curve determines the the social-cost curve determines the optimal output level.optimal output level.

The optimal output level is more than the The optimal output level is more than the equilibrium quantity.equilibrium quantity.

The market produces aThe market produces a smaller quantity smaller quantity than is socially desirable. than is socially desirable.

The social costs of production are less than The social costs of production are less than the private cost to producers and the private cost to producers and consumers.consumers.



Internalizing Production Internalizing Production ExternalitiesExternalities

Taxes are the primary tools used Taxes are the primary tools used to internalize negative to internalize negative externalities.externalities.

Subsidies are the primary tools Subsidies are the primary tools used to internalize positive used to internalize positive externalities.externalities.



Consumption Externalities...Consumption Externalities...

Quantity ofEducation

0

Price ofEducation

QMARKET


Socialvalue

QOPTIMUM

(b) Positive Consumption Externality


Quantity

of Alcohol

0

Priceof Alcohol

QMARKET

Demand (private value)


Social valueQ

OPTIMUM

(a) Negative Consumption Externality



Externalities and Market Externalities and Market InefficiencyInefficiency

Negative externalities in production or Negative externalities in production or consumption lead markets to produce consumption lead markets to produce a larger quantity than is socially a larger quantity than is socially desirable.desirable.

Positive externalities in production or Positive externalities in production or consumption lead markets to produce consumption lead markets to produce a larger quantity than is socially a larger quantity than is socially desirable.desirable.



Private Solutions to Private Solutions to ExternalitiesExternalities

Government action is not Government action is not always needed to solve the always needed to solve the

problem of externalities.problem of externalities.



The Coase TheoremThe Coase Theorem

The The Coase TheoremCoase Theorem states that if private states that if private parties can bargain without cost over the parties can bargain without cost over the allocation of resources, then the private allocation of resources, then the private market will always solve the problem of market will always solve the problem of externalities on its own and allocate externalities on its own and allocate resources efficiently.resources efficiently.



Why Private Solutions Why Private Solutions Do Not Always WorkDo Not Always Work

Sometimes the private solution Sometimes the private solution approach fails because transaction approach fails because transaction

costs can be so high that private costs can be so high that private agreement is not possible.agreement is not possible.



Public Policy Toward Public Policy Toward ExternalitiesExternalities

When externalities are significant and When externalities are significant and private solutions are not found, private solutions are not found, government may attempt to solve the government may attempt to solve the problem through . . .problem through . . .command-and-control policies.command-and-control policies.market-based policies.market-based policies.



JOIN KHALID AZIZJOIN KHALID AZIZ

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.B.COM.

FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.ICAP MODULE B, B.COM, BBA, MBA & PIPFA.

COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.

CONTACT:CONTACT:0322-33857520322-3385752R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,

KARACHI, PAKISTAN.KARACHI, PAKISTAN.

KHALID AZIZ COMMERCE EXPERT Externalities. KHALID AZIZ COMMERCE EXPERT JOIN KHALID AZIZ ECONOMICS...

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