Ch03 EXTERNALITIES AND GOVERNMENT POLICY（课件）- 《财政金融英文版》同步教学（人民大学版）

EXTERNALITIES AND GOVERNMENT POLICY C h a p t e r 3 1 Externalities Externalities are costs or benefits of market transactions not reflected in prices. A third party is affected by production or consumption Benefits or costs to the third party not considered by buyers or sellers Types of Externalities Negative externalities – costs to third parties other than buyers or sellers not reflected in the market price Damage by industrial pollution to people and property Positive externalities – benefits to third parties other than buyers or sellers not reflected in prices Fire prevention, such as smoke alarms and fireproofing Pecuniary externalities – effects of increases or decreases in the price of a good on existing customers as a result of changes in the demand or supply of a good Negative Externalities Marginal external cost (MEC) – extra cost to third parties resulting from production of another unit of a good or service MEC part of the marginal social cost (MSC) of making a good available MEC is not reflected in the price of the good Producers base decisions on marginal private cost (MPC) Negative Externalities Positive Externalities In a positive externality, prices do not fully equal the marginal social benefit (MSB) of a good or service. Marginal external benefit (MEB) – benefit of additional output accruing to parties other than buyers and sellers of the good Consumers base decisions on marginal private benefit (MPB) Positive Externalities MEB Declines with Annual Output Internalization of Externalities Internalization of an externality – marginal private benefit or cost of goods and services are adjusted so that users consider the actual marginal social benefit or cost of their decisions Negative externality: MEC is added to MPC Positive externality: MEB is added to MPB Corrective tax – designed to adjust MPC of a good or service in such a way as to internalize the externality; must equal MEC per unit Corrective Tax Other Means of Internalizing Externalities