KRUGMAN'S MICROECONOMICS for AP* Externalities and Public Policy Margaret Ray and David Anderson Micro: Econ: Module

What you will learn in this Module : How external benefits and costs cause inefficiency in markets. Why some government policies to deal with externalities, such as emissions taxes, tradable emissions permits, and Pigouvian subsidies, are efficient, although others, including environmental standards, are not.

Policies Toward Pollution Environmental Standards Emissions Taxes Tradable Emissions Permits

Production, Consumption, and Externalities Private versus social benefits Private versus social costs

Positive Externalities When the production and consumption of a good provides benefits to third parties, that good is said to provide positive externalities to society. Qty home improvements Price, MSB MPB MSB S P opt Q opt Q mkt P mkt Subsidy P cons

Negative Externalities When the production and consumption of a good creates costs to third parties, that good is said to create negative externalities to society. Qty electricity Price, MSC MPC D MSC P opt Q opt Q mkt P mkt Tax P firm

Network Externalities A network externality exists when the value to an individual of a good or service depends on how many other people use the same good or service.