External Costs and Benefits

Steven E. Landsburg

Chapter 13 in Price Theory and Applications, 2024, pp 507-568 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In previous chapters, we have analyzed the gains from trade that accrue to voluntary participants in transactions. However, many transactions involve involuntary participants as well. The neighbors who breathe the smoke from a polluting factory, the naturalist who deplores the harvesting of whales, the shoppers who enjoy the spectacle of department store Christmas displays — all incur costs or benefits from transactions in which they had no part. Such costs and benefits are said to be external and are collectively referred to as externalities. External costs (like the annoyance of breathing factory smoke) are called negative externalities, and external benefits (like the pleasure from seeing Christmas decorations) are called positive externalities.In this chapter, we will see how externalities can be a source of economic ineffciency. We also will discuss what can be done about that problem.

Keywords: Microeconomics; Price Theory; Supply and Demand; Demand Curve; Adverse Selection; Budget Line; Indifference Curve; Common Property; Competition; Competitive Industry; Constant-cost Industry; Consumer Surplus; Producer Surplus; Social Gain; Social Welfare; Efficiency Criterion; Economic Efficiency; Cost; Price; Deadweight Loss; Price Ceiling; Tariff; Rationing; Quotas; Equimarginal Principle; Price Discrimination; Monopoly; Two-part Pricing; Two-part Tariff; Fishery; Collusion; Income Effect; Substitution Effect; Normal Good; Inferior Good; Giffen Good; Externality; Property Right; Coase Theorem; Transactions Cost; Law of Demand; Marginal Cost; Marginal Revenue; Marginal Value; Market Failure; Moral Hazard; Nash Equilibrium; Normative Criterion; Positive Economics; Oligopoly; Hayek; Social Cost; Economics of Information; Sales Tax (search for similar items in EconPapers)
JEL-codes: D D04 D4 L11 (search for similar items in EconPapers)
Date: 2024
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