Negative Externalities in Action
A person vaccinates their child against a contagious disease.
Positive externality: protects others from disease
When prices are low, people buy more of a good. This shows that prices act as what?
Prices are incentives—they influence consumption and production decisions.
Vaccines help the person who gets them and also reduce disease spread for others. This extra benefit is called what?
Positive Externality
The upward-sloping blue line on a supply and demand graph of externalities shows what?
Supply = private cost to producers
This type of tax takes a higher percentage from people with higher incomes.
Progressive tax
A factory pollutes the Fox River while producing paper.
Negative externality
A company produces a product but some extra costs, like pollution, aren’t included in the price. This type of problem in the market is called what?
Market failure due to externalities
A community decides to install solar panels on public buildings. How does this create a positive externality for the city?
Reduces pollution and energy costs for residents; benefits society beyond the installer
Private cost includes wages, materials, and electricity, but ignores what?
External costs or benefits
This type of tax takes a higher percentage from people with lower incomes.
Regressive tax
Pollution from factories harms people’s health and the environment, but the company does not pay. Who bears the cost?
Society or third parties bear the external costs
If someone makes a product and other people are affected without being part of the transaction, what is that called?
An externality
Planting trees along streets increases air quality, property values, and mental health benefits for residents. Why might the private market provide fewer trees than socially optimal?
The planter doesn’t capture all benefits, so they invest less than the socially optimal amount
When a product’s production imposes costs on society, but not on the producer, the supply curve should include what to show the true cost?
External cost
A federal program that provides health coverage for Americans over 65 or with certain disabilities.
Medicare
If the cost of pollution isn’t included in the price of a product, what happens to the quantity produced ?
Too much is produced
When a product’s price ignores external costs, the market produces too much of it. What is this overproduction called in economics?
Deadweight loss from a negative externality
When companies underproduce goods that have positive externalities because they don’t capture all societal benefits, what problem occurs?
Market underproduction of goods with positive externalities
When a positive externality exists, the market produces less than the socially optimal quantity. What policy can correct this?
Subsidy to increase production
Programs like Social Security, Medicaid, and unemployment benefits that provide financial support to qualifying individuals.
Entitlement programs
On a supply and demand graph, showing private cost vs external cost, the triangle representing lost total benefits to society is called what?
Deadweight loss
The private market only considers which costs and benefits?
Private costs and private benefits (ignoring externalities)
Governments often give per-unit money to producers to encourage more production of goods with positive externalities. What is this called?
Subsidy
In a negative externality, the market produces too much. What policy can reduce production to the socially optimal level?
Tax on the good
Financial aid provided to low-income individuals or families to help meet basic needs, such as food or housing.
Welfare