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LESSON 12 THIRD-PARTY COSTS AND BENEFITS 12-1 HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Market Failure Market prices usually reflect the benefits and costs received by the producers and consumers involved in an exchange. A kind of market failure occurs when market prices DO NOT reflect all the costs and all the benefits involved. This type of market failure is called an externality.
LESSON 12 THIRD-PARTY COSTS AND BENEFITS 12-2 HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Externalities Externalities exist when some of the costs or benefits associated with the production or consumption of a product "spill over" to third parties, who do not produce or pay to consume the product. Negative externalities are costs paid by someone who does not produce or pay to consume a product. –Examples? Cigarette smoking: secondhand smoke; health costs
LESSON 12 THIRD-PARTY COSTS AND BENEFITS 12-3 HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Externalities Positive externalities are benefits enjoyed by someone who does not produce or pay to consume a product. –Examples? Education: society benefits from increased productivity; less crime; lower rates of poverty; etc.
LESSON 12 THIRD-PARTY COSTS AND BENEFITS 12-4 HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Positive or Negative Externalities Driving a car on crowded highway? Apartment dwellers who buy fire alarms or fire extinguishers? Neighbor playing loud music while you study? New landscaping in neighbor’s yard? Negative: exhaust fumes, etc. Positive: other dwellers benefit Negative: you bear cost of not concentrating Positive: increases value of houses in neighborhood.
LESSON 12 THIRD-PARTY COSTS AND BENEFITS 12-5 HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Activity 12.2: Externalities Worksheet Price Quantity (Tons of Steel) 0 P S D Q S1S1 P1P1 Q1Q1
LESSON 12 THIRD-PARTY COSTS AND BENEFITS 12-6 HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Activity 12.2: Externalities Worksheet 0 P Price Quantity (Years of Education) S D Q P1P1 Q1Q1 D1D1
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