SS.912.E.2.11 Assess the economic impact of negative and positive externalities on the local, state, and national environment Standard 2 Understand the fundamental concepts relevant to the institutions, structure, and functions of a national economy SS.912.E.2.11 Assess the economic impact of negative and positive externalities on the local, state, and national environment

First we need to understand efficiency Economic efficiency- the largest net benefit is achieved Rule: Engage in an activity so long as marginal benefit is greater than marginal cost

Graph:

Example of people who didn’t follow the rule Video: Along Came Polly

Example of someone who did follow the rule Video: The Sandlot marginal benefit of kissing lifeguard

Externalities External costs- spillover effects that reduce the well-being of nonconsenting third parties; costs imposed on others who are not part of the market transaction; also known as neighborhood effects External benefits- spillover effects that increase the well-being of nonconsenting third parties; benefits accrued to others who are not part of the market transaction

Externalities Not all costs and benefits will be used in decision making (external costs and benefits are typically ignored) With an external cost, too many units are produced and price is too low With an external benefit, too few units are produced and price is too low

Example of negative externality: Video: Jonah, A Veggie Tales Movie

Another way to think of externalities: Negative externality – a cost imposed on you for an activity you’re not directly involved in and you would like to see less of the activity Positive externality – a benefit accrued to you for an activity you’re not directly involved in and you would like to see more of the activity

Graph of external cost:

Graph of external benefit:

Why do externalities produce inefficient outcomes? With an external cost, too many units are produced and price is too low With an external benefit, too few units are produced and price is too low External costs and benefits are ignored, difficult to measure, or hard to distribute to affected parties

Story from Economics is Everywhere

A recent news story showed how complex the interactions that involve externalities can be. The overfishing of Pollock in Alaskan waters has, so scientists claim, reduced the population of seals, which eat Pollock. With fewer seals, orca whales have lost their favorite prey and have had to move closer to shore to prey on sea otters. The sea otter population is down, allowing their prey- sea urchins- to multiply rapidly and chew up the underwater kelp forests near the shore. Since the kelp forests aren’t there, the shorelines are more exposed to waves that generate beach erosion and have caused an increasing loss of shoreline housing. This six-step externality is the most complex I’ve heard of. It illustrates how something seemingly harmless- overfishing just one species- can generate serious negative effects in an area that to a layperson would seem very far removed from the action that originally produced the externality. Q: List one remedy that the government could introduce to reduce the problem of beach erosion presented in this story. Are there any potential secondary effects of your solution?

The Great Economics Mysteries Book Chapter 5 Lesson 5 The Dark Side of Curbside Recycling

Focus: Understanding Economics in Civics and Government Lesson 13 Government Failure: Using Public Choice Theory to Analyze Political Decisions

The Great Economics Mysteries Book Chapter 5 Lesson 8 Why Are Our National Parks Crumbling?

Video: Car whistle news report- externalities