经济学--Externalities Market Efficiency - Market Failures Recall that:Adam Smith’s “invisible hand” of the marketplace leads self-interested buyers and sellers in a market to maximize the total benefit that society can derive from a market. But market failures can still happen. Market Failures:Externalities When a market outcome affects parties other than the buyers and sellers in the market, side-effects are created called externalities. Externalities cause markets to be inefficient, and thus fail to maximize total surplus. An externality arises... . . . when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensationfor that effect. Market Failures:Externalities When the impact on the bystander is adverse, the externality is called a negative externality. When the impact on the bystander is beneficial, the externality is called a positive externality. Automobile exhaust Cigarette smoking Barking dogs (loud pets) Loud stereos in an apartment building Examples of Negative Externalities Immunizations Restored historic buildings Research into new technologies Examples of Positive Externalities The Market for Aluminum... Quantity of AluminumDemand (private value) Supply (private cost) The Market for Aluminum and Welfare Economics The quantity produced and consumed in the market equilibrium is efficient in the sense that it maximizes the sum of producer and consumer surplus. The Market for Aluminum and Welfare Economics If the aluminum factories emit pollution (a negative externality), then the cost to society of producing aluminum is larger than the cost to aluminum producers. The Market for Aluminum and Welfare Economics For each unit of aluminum produced, the social cost includes the private costs of the producers plus the cost to those bystanders adversely affected by the pollution. Pollution and the Social Optimum... Quantity of AluminumDemand (private value) Supply (private cost)