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Principles of Microeconomics


Externalities


An externality is the uncompensated impact of one person’s actions on the well-being of a bystander. Pollution is a classic example of a negative externality, which imposes external costs on society. Education is a classic example of a positive externality, which imposes external benefits on society. In the Pecasts for this topic, negative and positive externalities will be covered as well as a comparison of regulation to corrective taxes and a comparison of corrective taxes to tradeable permits.


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Negative Externality

This Pencast shows how to illustrate the existence of a negative externality in a competitive market. The presence of a negative externality implies that the free market will produce an inefficiently high level of output, which results in a deadweight loss. The Pencast also provides some discussion on how the market could be moved to the social optimum. [Play Pencast]


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Positive Externality

This Pencast shows how to illustrate the existence of a positive externality in a competitive market. The presence of a positive externality implies that the free market will produce an inefficiently low level of output, which results in a deadweight loss. The Pencast also provides some discussion on how the market could be moved to the social optimum. [Play Pencast]


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Regulation Versus Corrective Taxes

This Pencast compares two policy tools that could be used to curb the harmful effects of pollution. Regulation sets the quantity of pollution that each firm in the market is allowed to produce, while corrective taxes set the price of pollution. The Pencast explains why corrective taxes can achieve the same reduction in pollution that regulation can but that corrective taxes are more efficient. [Play Pencast]


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Corrective Taxes Versus Tradeable Permits

This Pencast compares corrective taxes and tradeable permits. Both of these policy tools make use of market principles to reduce pollution. Corrective taxes set the price of pollution, while tradeable permits set the quantity of pollution. Tradeable permits are similar to regulation, except firms would be able to trade their pollution rights in the marketplace. [Play Pencast]


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