Module Micro 39 Econ 75 Externalities and Public

Module Micro: 39 Econ: 75 Externalities and Public Policy KRUGMAN'S MICROECONOMICS for AP* Margaret Ray and David Anderson

What you will learn in this Module: • How external benefits and costs cause inefficiency in markets. • Why some government policies to deal with externalities, such as emissions taxes, tradable emissions permits, and Pigouvian subsidies, are efficient, although others, including environmental standards, are not.

Policies Toward Pollution • Environmental Standards • Emissions Taxes • Tradable Emissions Permits

Production, Consumption, and Externalities • Private versus social benefits • Private versus social costs

Positive Externalities When the production and consumption of a good provides benefits to third parties, that good is said to provide positive externalities to society. Price, MSB S Popt Pmkt Pcons Subsidy MPB Qmkt Qopt MSB Qty home improvements

Negative Externalities Price, MSC When the production and consumption of a good creates costs to third parties, that Popt good is said to create Pmkt negative externalities Pfirm to society. MSC MPC Tax D Qopt Qmkt Qty electricity

Network Externalities A network externality exists when the value to an individual of a good or service depends on how many other people use the same good or service.