1. Negative Externalities
Where the Free Market Needs Help

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

3. 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

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

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

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

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

8. Acid Rain

9. Global Warming

10. 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.

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

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