1. 4 THE ECONOMICS OF THE PUBLIC SECTOR

2. Copyright © 2006 Thomson Learning 10 Externalities

3. Figure 1 The Market for Aluminium Copyright © 2004 South-Western Quantity of Aluminum 0 Price of Aluminum Equilibrium Demand (private value) Supply (private cost) Q MARKET

4. Figure 2 Pollution and the Social Optimum Copyright © 2004 South-Western Equilibrium Quantity of Aluminum 0 Price of Aluminum Demand (private value) Supply (private cost) Social cost Q OPTIMUM Optimum Cost of pollution Q MARKET

5. Figure 3 Education and the Social Optimum Copyright © 2004 South-Western Quantity of Education 0 Price of Education Demand (private value) Social value Supply (private cost) Q MARKET Q OPTIMUM

6. Figure 4 The Equivalence of Pigovian Taxes and Pollution Permits Copyright © 2004 South-Western Quantity of Pollution 0 Price of Pollution Demand for pollution rights P Pigovian tax (a) Pigovian Tax 2.... which, together with the demand curve, determines the quantity of pollution. 1.A Pigovian tax sets the price of pollution... Q

7. Figure 4 The Equivalence of Pigovian Taxes and Pollution Permits Copyright © 2004 South-Western Quantity of Pollution 0 Demand for pollution rights Q Supply of pollution permits (b) Pollution Permits Price of Pollution 2.... which, together with the demand curve, determines the price of pollution. 1.Pollution permits set the quantity of pollution... P