Tài chính công : Externalities & Public Goods

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Chapter 16
and Public

© 2004 Thomson Learning/South-Western

Defining Externalities
 An

externality is the effect of one party’s
economic activities on another party that is not
taken into account by the price system.
 Externalities can occur between any two
economic actors.
 Externalities can be beneficial or harmful.


Defining Externalities (cont.)



If social costs are greater than private costs, then a
negative externality is present. Environmental pollution
is an example of a social cost that is seldom borne
completely by the polluter thereby creating a negative
If private costs are greater than social costs, then a
positive externality exists. An example is when a
supplier of educational services indirectly benefits
society as a whole but only received payment for the
direct benefit received by the recipient of the
education: the benefit to society of an educated
populace is a positive externality.

Negative Externalities


Automobile exhaust
Cigarette smoking
Barking dogs (loud pets)
Loud stereos in an apartment building

Positive Externalities


Restored historic buildings
Research into new technologies

Externalities between Firms
 Consider

two firms--one producing eyeglasses,
and another producing charcoal.
 The production of charcoal is said to have an
external effect on the production of eyeglasses
if the output of eyeglasses depends not only on
the amount of inputs chosen by the eyeglass
firm but also on the level of production of

Externalities between Firms
 Suppose

the eyeglass firm is near and
downwind from the charcoal company.
 The amount of eyeglasses may depend upon
the amount of charcoal in the air which affects
the precision grinding wheels.
 The level of eyeglass production is partially
determined by the amount of charcoal
produced, with more charcoal reducing the
amount of eyeglasses.

Externalities between Firms
 One

of the most famous beneficial externalities
between firms involves one firm producing
honey and the other producing apples.


Bees feed on apple blossoms, which increases the
production of honey, and
Bees pollinate apple crops, which increases the
production of apples.

 Firms

can generate air, water, and other
types of pollution when producing products.
 Alternatively, auto pollution, graffiti, and noise
are some externalities imposed by people on
 When people do things that ha...
Chapter 16
and Public
© 2004 Thomson Learning/South-Western
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