Negative Externalities Where the Free Market Needs Help

EXTERNALITIES An externality is the uncompensated impact of one person’s actions on another person

Efficiency requires: All costs of production must be counted by producers If pollution is “not counted” => society bears the costs of production This is not efficient

Negative Externalities Automobile exhaust Cigarette smoking Barking dogs (loud pets) Loud stereos in an apartment building Noisy Students Neighbor’s poorly maintained property Pollution

Positive Externalities Restored historic buildings Research into new technologies Neighbor’s well maintained property Youtube video—cool examples

MARKET INEFFICIENCY Negative externalities lead markets to overproduce Market price should be here Quantity demanded/ supplied at the true price should be here

Specific Examples: Lake Erie Before After Regulation/Clean Up Efforts

Acid Rain

Global Warming

Solutions to Pollution Increase Government Regulation a) Tax the pollutant b) Fine corporations/individuals who pollute c) Provide incentive to not pollute oil carbon, etc.

Creating an Incentive to Not Pollute: Cap & Trade System Gov’t can create a system of trading pollution credits [Read Article if time]

Global Pollution Standards Questions to consider: Who is in charge of pollution standards? 2. Should countries all have the same pollution/ environmental standards?