Externalities - AP Microeconomics

They result in overproduction or underproduction of goods. External costs and benefits are ignored by market participants.

Pollution. Harms third parties not involved in the polluting activity.

They decrease social welfare. Harmful spillover effects reduce overall social well-being.

They lead to inefficient allocation of resources. External effects cause resources to go to suboptimal uses.

They increase social welfare. Beneficial spillover effects enhance overall social well-being.

Negative externality. Social costs exceed private costs, leading to excessive market production.

Positive externality. Social benefits exceed private benefits, leading to insufficient market production.

Public funding for education. Government support increases beneficial activities that create positive spillovers.

A well-defined cap on the total level of externality. Permits only work with enforceable limits on total pollution allowed.

Lack of information about external costs or benefits. Market prices don't reflect true social costs and benefits.

To implement policies that internalize externalities. Governments can correct market failures through taxes, subsidies, or regulation.

Negative externality. Industrial waste harms those not involved in production decisions.

Positive externality. Individual protection creates broader community health benefits.

Supply and demand diagrams. Shows how external effects shift social costs or benefits from private ones.

They result in overproduction or underproduction of goods. External costs and benefits are ignored by market participants.

Tradable permits. Allows firms to buy and sell rights to create externalities.

Externalities can reduce producer surplus due to inefficient production levels. Market distortions prevent optimal production and profit levels.

Improved market efficiency. Resources are allocated to their most socially beneficial uses.

A situation where the market does not allocate resources efficiently. Resources are not allocated to their highest-valued uses.

It shifts the supply curve to the left. Higher costs reduce quantity supplied at each price level.

To reduce negative externalities such as pollution. Limits harmful environmental spillover effects on society.

Transaction costs. The expenses of negotiating and enforcing agreements between parties.

Adjusting incentives so that private costs or benefits reflect social costs or benefits. Making decision-makers face the full social costs and benefits of their actions.

Increase the production or consumption of goods with positive externalities. Lower costs encourage more of the beneficial activity.

Regulation. Direct government rules can limit harmful external effects.

Well-defined property rights can help resolve externalities. Clear ownership allows parties to negotiate solutions to external effects.

Education. Benefits society beyond the individual receiving education.

Low transaction costs and well-defined property rights. Negotiation and enforcement costs must be minimal for market solutions to work.

It states that private parties can solve externalities if transaction costs are low. Assumes parties can negotiate without government intervention if conditions are met.