1. Macro Chapter 4 Presentation 2

2. Externality Some of the costs or benefits of a good are passed on to or “spill over” to a 3 rd party that is external to the transaction

3. Negative Externalities Costs inflicted on a 3 rd party without compensation Ex- environmental pollution: a chemical company dumps waste into the river, harming the fish and water supply

4. Negative Externalities cont’d When a firm avoids costs by polluting, its supply curve will be further to the right As a result the cost is too low and output too high for allocative efficiency ***this causes an overallocation of the use of resources for the good

5. Government Actions for Negative Externalities 1. Legislation- limit or eliminate the problem--- increases the cost of production through purification devices, exhaust systems etc. 2. Taxes- this would cause the firm to supply less of the good

6. Positive Externalities A positive benefit obtained without compensation by third parties Ex- immunization shots benefit society Schools also provide better educated people, less likely to commit crime or rely on government funding

7. Positive Externalities Cont’d A market failure exists here in the form of underallocation---- society would benefit from having more of the externality

8. Government Actions to Correct for Positive Externalities 1. Subsidize Consumers- increase the demand for the good/service (ex low int. loans for college) 2. Subsidize Suppliers- state $$ to colleges 3. Provide the goods- US Post Office, vaccines

9. Principal Agent Problem The principals are the owners of the corporation that hire agents to run the business The interests of the principals and agents often conflict Ex- executives build expensive offices or buy corporate jets, which cuts into profits

10. Rivalry When one person buys a good/service, it is not available for purchase and consumption by someone else

11. Excludability Only buyers who are willing and able to pay for a G/S can obtain its benefit

12. Public Goods Everyone can simultaneously obtain the benefit from such a good Nonrivalry and Nonexcludability Ex- Public defense, street lights, environmental protection

13. Free-Rider Problem People receive benefits from a public good without contributing to its costs ***this makes the goods unprofitable to private firms

14. Quasi Public Goods A good/service where excludability could apply but has such a large positive externality the gov’t sponsors its production to prevent underallocation Libraries, museums, schools