Transcript Externalities.ppt

Externalities
• A positive externality exists when all of the social benefits associated
with the production and consumption of a good or service are not
captured by the private market. When a positive externality exists the
private market produces a less-than socially optimal level of output.
There is too little production. Government usually attempts to
increase the level of output by subsidizing the production of the good
or service or by providing the good or service itself. An example of a
good/service with positive externalities is childhood immunizations
(public health benefits).
• A negative externality exists when all of the social costs associated
with the production and consumption of a good or service are not
captured by the private market. When a negative externality exists
the private market produces a more-than socially optimal level of
output. There is too much production. Government usually
attempts to decrease the level of output by placing regulations or
taxes on the production or consumption of the good or service. An
example of a good/service with negative externalities is motor
vehicles (pollution).