Transcription of Externalities: Problems and Solutions
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Externalities: Problems and Solutions
externalities : Problems and Solutions131 Undergraduate Public EconomicsEmmanuel SaezUC Berkeley1 OUTLINEC hapter Externality Private-Sector Solutions to Negative Public-Sector Remedies for Distinctions Between Price and Quantity Approaches toAddressing Conclusion2 externalities : Problems AND SOLUTIONSM arket failure: A problem that violates one of the assump-tions of the 1st welfare theorem and causes the market econ-omy to deliver an outcome that does not maximize efficiencyExternality: externalities arise whenever the actions of oneeconomic agent make another economic agent worse or betteroff, yet the first agent neither bears the costs nor receives thebenefits of doing so:Example: a steel plant that pollutes a river used for recreationExternalities are one example of market failure3 EXTERNALITY THEORY: ECONOMICS OFNEGATIVE PRODUCTION EXTERNALITIESN egative production externality: When a firm s productionreduces the well-being of others who are not compensated bythe marginal cost (PMC): The direct cost to producersof producing an additional unit of a goodMarginal Damage (MD): Any
amount of fossil fuel a vehicle requires to travel a mile. SUV drivers use more gas to go to work or run their errands, increasing fossil fuel emissions. ! !Wear and Tear on Roads: ! !Each year, federal, state, and local governments spend $33.2 billion repairing our roadways. Damage to roadways comes from many sources, but a major culprit is
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