Externalities: third party (or spill-over) effects arising from the production and/or
consumption of goods and services for which no appropriate compensation is paid.
Externalities can cause market failure if the price mechanism does not take into account
the full social costs and social benefits of production and consumption.
SOCIAL COST = PRIVATE COST + EXTERNALITY
Positive Externalities exist when the
marginal social benefit of production and or
consumption exceeds the marginal private benefit
i.e. production and/or consumption generate
external benefits that may go under-valued by the market.
*Positive
externalities lead markets to produce a smaller quantity than is socially
desirable. To remedy the problem, the government can internalize the
externality by subsidizing goods that have positive externalities.
Negative Externality: when an individual or firm making a decision does not
have to pay the full cost of the decision.
If a good has a negative externality, then
the cost to society is greater than the cost
consumer is paying for it. Since consumers
make a decision based on where their
marginal cost equals their marginal benefit,
and since they don't take into account the
cost of the negative externality, negative
externalities
result in
market
inefficiencies.
Common
examples of
negative
externalities
include
smoking, pollution, and
negative externalities
from crimes.
*Negative Externalities
lead markets to produce a
larger quantity than is
socially desirable. To
remedy, the government
can internalize the
externality by taxing goods
that have negative
externalities.
Some market failure is due to lack of public
goods.
*Public Goods: a good that is non-rivaled and
non-excludable. This means, respectively, that
consumption of the good by one individual
does not reduce availability of the good for
consumption by others; and that no one can
be effectively excluded from using the good
The lack of public goods causes market failure
because the markets are unable to provide the desirable quantity of the goods because of
their own self-interest. The best example of a public good is National Defense.
With merit goods - the state is concerned with maximizing the consumption of certain
goods which it deems to be desirable; goods and services where the social benefits
exceed the private benefits; in other words, these goods cause positive externalities.
Examples of merit goods are: education,
fire service and healthcare.
Merit goods are positive externalities and,
if they are provided by private markets,
they are under consumed. If the
government wishes to intervene, it can
either subsidize the producer or provide
for the the goods itself.
A demerit good is a good or service whose
consumption is considered unhealthy, degrading, or otherwise socially undesirable due
to the perceived negative effects on the consumers themselves. It is over-consumed if
left to market forces. Common examples of demerit goods are alcohol, tobacco, drugs,
junk food, gambling and
prostitution.
Demerit goods cause negative
externalities and the government
can do two things to try and
correct the market failure: it can
tax the producers of the
undesirable goods or it can invest
in advertisements and programs that advocate against the demerit goods; an example
of this would be campaigns in school for children to see the adverse effects of drugs and
smoking.
Market Failure can also be caused by the abuse of monopoly power; because some
companies have monopolistic power, they create market failure because they do
not operate at a socially optimal level but at a profit-maximizing point that is
unbeneficial to society.
MINI INTERNAL ASSESSMENT
Former U.S. President Clinton joins effort in reducing Los
Angeles pollution
www.chinaview.cn
2009-02-17 07:06:29
LOS ANGELES, Feb. 16 (Xinhua) -- Former U.S. President Bill Clinton joined Los Angeles
Mayor Antonio Villaraigosa on Monday in unveiling what is called the largest effort by a U.S. city
to reduce pollution by retrofitting incandescent street lights with more efficient LEDs or light
emitting diodes.
"This is the best place in the world -- in the U.S. at least --to lead this," Clinton said in reference
to the city's ongoing environmental efforts. "This is like taking 6,000 cars off the road."
Calling it a "great day in Los Angeles," Clinton said that "if every major city followed your lead,
we could eliminate 2 1/2 coal-fired power plants."
Over a five-year period starting in July, the city will retrofit 140,000 of its residential street lights
with LEDs, according to city officials.
The project is expected to reduce carbon emissions by 40,500 tons and save 10 million U.S.
dollars annually.
Villaraigosa said the effort would help make Los Angeles the "cleanest, greenest big city" in the
United States.
"We are building a bridge to a sustainable future," he said.
Clinton said money from the 787-billion-dollar federal stimulus package President Obama
plans to sign Tuesday includes funds for environmental efforts similar to the Los Angeles street
light program.
"If we help you to live green," Clinton said, there could be a time when "every major city could
be without a landfill."
The ex-president began the Clinton Climate Initiative in August2006 to help fight global
warming. It is a partnership with the C40 Large Cities Climate Leadership Group, an association
of large cities worldwide, including Los Angeles, that have pledged to accelerate their effort to
reduce greenhouse emissions.
Analysis: