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Externalities - Coggle Diagram
Externalities
Externalities
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• Externality: one type of market failure
– Arises when a person engages in an activity that influences the well-being of a bystander
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The Social Benefit
• With a positive externality, the social value of a good includes
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Market Inefficiency
• Self-interested buyers and sellers
– Do not take into account the external effects of their actions: market outcome is not efficient
• “Government action can sometimes improve upon market outcomes”
– Why markets sometimes fail to allocate resources efficiently
– How government policies can potentially improve the market’s allocation
– What kinds of policies are likely to work best
The Social Cost
• With negative externalities, the social cost includes:
–Private cost (the direct cost to sellers) –the supply curve
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