Externalities

1
Externalities

• -an undesirable property of Perfect Competition
• -Market Failures ????

2
An Externality is .

• a good or a bad not priced in the market.
• when a good has no price or the wrong price.
• assumed away in the PC model.

3
Negative Externality

• E.g., pollution
• Firm doesnt bear the full costs of production.
• Firm produces more than is socially optimal.

4
Positive Externality

• E.g., a garden view, a scientific discovery, a
  public good
• Beneficial, but uncompensated action.
• Too little produced than is socially optimal.

5
An example of pollution

• PC says set PMC. BUT
• Private MC (to the firm) vs. Social MC !!!!!!
• In the PC model, costs are underestimated, and
• ? Price is too low!!!!

6
What PC doesnt consider
7
Solutions

• Regulation to produce Q
• Internalize the externality
• Impose a tax on the firm
• Sell Pollution Permits

8
What would Coase say?

• With perfect property rights
• ? Doesnt matter!!!!!!
• With ill-defined property rights
• ? assign rights so as to minimize DWL

9
So ..

• what IS a Market Failure?????