LESSON 12 THIRD-PARTY COSTS AND BENEFITS

12-1

HIGH SCHOOL ECONOMICS 3RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY

Market Failure

• Market prices usually reflect the benefits and costs received by the producers and consumers involved in an exchange.

• A kind of market failure occurs when market prices DO NOT reflect all the costs and all the benefits involved.

• This type of market failure is calledan externality.

LESSON 12 THIRD-PARTY COSTS AND BENEFITS

12-2

HIGH SCHOOL ECONOMICS 3RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY

Externalities• Externalities exist when some of the

costs or benefits associated with the production or consumption of a product "spill over" to third parties, who do not produce or pay to consume the product.

• Negative externalities are costs paid by someone who does not produce or pay to consume a product.– Examples?

Cigarette smoking: secondhand smoke; health costs

LESSON 12 THIRD-PARTY COSTS AND BENEFITS

12-3

HIGH SCHOOL ECONOMICS 3RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY

Externalities

• Positive externalities are benefits enjoyed by someone who does not produce or pay to consume a product.– Examples?

Education: society benefits from increased productivity; less crime; lower rates of poverty; etc.

LESSON 12 THIRD-PARTY COSTS AND BENEFITS

12-4

HIGH SCHOOL ECONOMICS 3RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY

Positive or Negative Externalities

• Driving a car on crowded highway?

• Apartment dwellers who buy fire alarms or fire extinguishers?

• Neighbor playing loud music while you study?• New landscaping in neighbor’s yard?

Negative: exhaust fumes, etc.

Positive: other dwellers benefit

Negative: you bear cost of not concentrating

Positive: increases value of houses in neighborhood.

LESSON 12 THIRD-PARTY COSTS AND BENEFITS

12-5

HIGH SCHOOL ECONOMICS 3RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY

Activity 12.2: Externalities Worksheet

Price

Quantity (Tons of Steel)0

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LESSON 12 THIRD-PARTY COSTS AND BENEFITS

12-6

HIGH SCHOOL ECONOMICS 3RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY

Activity 12.2: Externalities Worksheet

0

P

Price

Quantity (Years of Education)

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DQ

P1

Q1

D1