Questions tagged [externalities]

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Why is the equilibrium network size can be less than the socially optimal size in networks w/ positive externalities for single system?

For Context, I am reading http://web.mit.edu/rpindyck/www/Courses/NetEx19.pdf. The chapter talks about network externalities in single system like fax machine, email, vaccinations for measles. ...
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58 views

Is there any academic source that uses the following 'standard broad' definitions of externality?

According to answer to this question by KennyLJ., there exists the following definition of externality: The simple, standard, and broad definition I favor is this: A decision's effects are called ...
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2answers
99 views

Is the use/consumption of natural resources considered an externality per se?

On a finite planet natural resources are rival goods by definition, i.e. if one agent uses/consumes a natural resource it becomes unavailable for other agents. Mankiw defines an externality as "the ...
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31 views

Externalities, Pigouvian Taxes and Wikipedia

It states on Wikipedia: A Pigovian tax (also called Pigouvian tax, after economist Arthur C. Pigou) is a tax imposed that is equal in value to the negative externality. The result is that the ...
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1answer
82 views

How much should it cost to close the beach?

For most of the past week a private surfing contest has closed off Steamer Lane - one of California's most popular waves - while paying only a few hundred dollars in permit fees. I think this is far ...
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24 views

Optimizing Lagrangian Function Subject to 4 Input/Output Constraints:

The objective function: $$\text{utility}=U\left(x_{c}, y_{c}\right)$$ subject to, $x_{o}=f\left(y_{i}\right)$ $y_{o}=g\left(x_{i}, x_{o}\right)$ $x_{c}+x_{i}=x_{o}+x^{*}$ $y_{c}+y_{i}=y_{o}+y^{*}$ ...
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1answer
32 views

Relationship between the Tragedy of the Commons and negative externalities?

I've read that the tragedy of the commons can be seen as a negative externality. That is, $MSC > MPC$. However, I'm having trouble understanding why the supply curve actually shifts downwards due ...
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21 views

Kaldor-Hicks optimum allocation with externality

Suppose there are two individuals. Level of good h can be determined only by individual 1 and it has a positive externality on individual 2. To find Pareto efficient allocation, we add the utilities ...
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34 views

Estimates of magnitude of externalities generated by education?

It is standard to claim that education generates positive externalities. For example, Mankiw (2017, Principles of Economics, p. 193): education also yields positive externalities. One externality ...
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1answer
20 views

Externalities from motor vehicles - more recent estimates?

I am looking for estimates for the externalities from motor vehicles. There's an excellent paper "Automobile Externalities and Policies" (2007) on this exact issue, but it's a bit old now. I was ...
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2answers
36 views

Is there an externality if someone buys all stock of some merchandise?

Is there an externality if someone buys all stock of some merchandise? On one hand, if they buy all of everything and there's still demand then they've taken it away from other people. On the other ...
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78 views

Is loss in tax revenue a negative externality?

I was thinking about how online gambling could cause numerous governments to face a reduction in tax revenue from conventional gambling, upon which taxes do apply in most countries. If governments ...
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1answer
46 views

(Microeconomics) How to classify Public Goods and Common Resources in Externalities?

In Microeconomics there are 4 types of externalities - Positive Consumption Externality, Positive Production Externality, Negative Consumption Externality, and Negative Production Externality. And ...
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1answer
50 views

Question regarding social welfare in the presence of externalities

I am currently learning high school level economics and I do not understand how indirect taxation may increase net social welfare in the presence of negative production externality. This is because, ...
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2answers
177 views

Providing subsidies affects Marginal Private cost but not Marginal Social Cost?

According to the theory that I'm seeing on the internet and in textbooks, when a government wants to correct underproduction due to a positive externality of production, they can decide to subsidize ...
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3answers
203 views

Is there really an “efficient equilibrium *price*” with externalities?

In the "Intro to Micro" approach to externalities, I've always felt uneasy as a teacher with the idea that there is something like an "efficient equilibrium" with a single "efficient price". To keep ...
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86 views

Does the Efficient Market Hypothesis Solve the Tragedy of the Commons?

My layman understanding of the Efficient Market Hypothesis is that there is so much brain power focused on the maximization of profit in the marketplace, that the market will find the best solution ...
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27 views

Question on Finding the Correct Emission Tax $t$

Let there be two companies $U_{1}$ and $U_{2}$ where, initially $U_{1}$ produces and sells $x$ units at $p=18$. Production costs are $C_{U_{1}}(x)=\frac{1}{6}x^3$ and in the process $a$ units of ...
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63 views

How does social cost and social benefit work?

I am really lost right now. I have a test tomorrow and I am stressing out. Whatever I look at for externalities, which could be my textbook, a website, notes from class, they all contradict each other....
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140 views

Is it right to derive social marginal benefit by adding individual prices instead of quantities?

I come across a lecture material on market functions and externalities that makes me quite confused. Here's the setup: Two stores are located next to each other. If one installs a camera system in ...
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139 views

Welfare status when a positive externality is subsidised

I was wondering if there is still welfare loss for example there is a positive externality in production of a good and the government decides to subsidise the good? I think it does still have ...
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1answer
453 views

Who pays externalities?

Suppose the state raises taxes in order to internalise externalities. Doesn't the consumer have to pay the additional external costs then, because the prices are raised due to the taxes?
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440 views

Private and Social Optimum with externality in this example

Firstly, I wanted to know if we may be consider as an externality, a situation such that a customer A bought a bike to a seller B, not properly checked - and which may provoke some accidents. ...
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39 views

Optimal taxing in case of negative externalities

Suppose an individual $i$ has the utility function $U= f(x(i)) - k$(sum of all $x$ with index not equal to $i$) Where $x(i)$ denotes the miles driven by $i$, and $k$ is a positive constant. The ...
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2answers
264 views

Are risk-costs a form of external costs?

An example to make to question more clear: With the use of nuclear power plants come several risk-costs (the risk of a nuclear disaster). These costs aren't included in the energy price and there is ...
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226 views

Pigouvian subsidies for non-linear marginal external benefits

Suppose an agent is choosing how much $x$ to consume and $p_x=200$. If the agent's marginal private benefit is $MPB(x)=300/x$ and $x$ takes only integer values, then he will choose to purchase just ...
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1answer
342 views

What would a negative externality diagram look like if the initial price is equal to 0 and then increased with tax?

The price of plastic bags in Scotland has been increased from free to 0.05 pounds sterling. How would I represent the negative externality decrease using a diagram in such a situation? This is what I ...
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168 views

Competitive prices, tax and lump sum cash transfer in case of externalities

An economy is made up of two people. The utility functions are $$u_1(x_{11},x_{12}) = x_{11}x_{12}$$ $$u_2(x_{21},x_{22}) = 2x_{21} + 2x_{22} −x_{11}$$ The initial endowments are $ω_1 = (1,0)$ and $...
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2answers
137 views

How can a free market be operated in a way that significant social and environmental costs are intrinsically covered?

More precisely, is there any practical way to operate a free market so that external costs, namely negative social and environmental impacts, become naturally (intrinsically) covered (paid for or ...
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2answers
178 views

Why does the European Union give subsidies to farmers?

According to neoclassical economics, subsidies are a solution to correct for the existence of externalities in consumption or production. What is the economic rationale/justification for such ...
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2answers
3k views

Pareto optimality with externalities

I'm reading the book "Economics of natural ressources and the environment" written by D. Pearce and R. Turner. They explain that the competitive equilibrium is not a Pareto optimum in case of (...
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1answer
470 views

Externalities - First order conditions

I am currently reading the book "Microeconomics: Principles and Analysis" by Cowell on my own. I'm reading the externalities chapter, and i found an interesting example: There are just two firms: ...
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1answer
358 views

Understanding at a quote about externalities in law and economics

that something is an externality is partly a statement about physical reality and partly a statement about the legal system. What does this mean? I assume the aspect of externality being a physical ...
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1answer
583 views

Negative consumer externality vs demerit good - what's the difference?

The example I was given for each was cigarettes. What market may have negative consumer externalities but is not a market for a demerit good? What is a type of demerit good that may not have a ...
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1answer
317 views

Confusion regarding remedying negative externalities of consumption through taxation

This diagram in my textbook illustrates two solutions to a negative externality of consumption - here, the consumption of cigarettes. It states that MSC is shifted upwards by the specific tax. Since ...
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1answer
318 views

What are the current economic theories of product advertising?

Are there any well known economic theory references about advertising? It seems you could think of advertising as imposing a negative externality on other producers or on consumers in that it takes up ...
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183 views

Are obstructed views a negative externality?

I recently read an excellent paper on the causes of high urban real estate prices in the United States, Why is Manhattan so expensive? Regulation and the rise in house prices (GLAESER, GYOURKO, and ...
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1answer
511 views

Has the “dismal theorem” practical implications?

The so-called "dismal theorem" asserts that we do not appropriately account for catastrophic scenarios which have very small probability of occurrence. It has been studied in details by Martin's ...
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4answers
3k views

Is market failure constant? What properly defines it?

My textbook defines market failure as when "the production or consumption of a good or service causes additional positive or negative externalities on a third party not involved in the economic ...
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213 views

Finding Pareto efficiency from competitive equilibrium

So to my knowledge, the competitve equilibrium would be Marginal cost= Marginal private benefit. My question is, how would you determine what the pareto efficiency is from the Marginal social benefit ...
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1answer
315 views

Music Streaming Impact on Producers

I am currently writing a news commentary on music streaming services. My commentary is focused on demand and supply, consumer and producer surplus, externalities, and public goods. And there are a few ...
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1answer
292 views

Network goods in competitive markets vs. socially optimal network size

In networks economics, the socially optimum equilibrium is bigger than the one in perfect competition (see for instance, Easley and Kleinberg 2010, Ch. 17). Why is that so? Could you provide me with ...
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1answer
222 views

Equilibrium with Externalities: Solving without FOC

I have a general equilibrium problem, where households given objective function $U(c,n)$ solve for working hours and consumption $n, c$, and firms use labor to produce a consumption good - their ...
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4answers
1k views

Are billboards beneficial for the economy? Why?

Billboards cost money to make and don't really seem to significantly benefit anyone other than billboard-makers. A company c putting up billboards presumably increases profits from the resulting ...
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1answer
612 views

What's the difference between a “consequential” and a “direct” externality?

I'm reading Png & Hui on the economics of privacy. (http://128.118.178.162/eps/io/papers/0505/0505007.pdf great review article). Can someone explain the difference between direct and consequential ...
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59 views

Empirical evidence on what makes a border adjustment successful at correcting a distortion without exporting externalities?

One of the challenges of constructing a national or regional market-correction scheme to remove the distortions from negative externalities, is that such a scheme is liable to create leakage: for ...
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1answer
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Pricing a negative externality under high uncertainty and severe non-linearity

Take a negative externality such as excess greenhouse gas emissions. We know some awkward things about the economic cost of this externality: There is fairly large uncertainty about the timing of ...
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317 views

A market correction for an industry which has had long-run negative externalities

Take a market where there have been long-run negative externalities. That is to say, the negative externalities have been in place long enough to have played a part in the investment decisions for all ...
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2k views

Differentiate a positive externality and the absence of a negative externality. Tax or subsidize?

I hope this isn't overly semantic, but I'd like to gain some clarification on the use positive (or negative) externality. I usually shoot down suggestions for examples of positive externalities like ...