Ex Tern Ali Ties
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Externalities
Externalities
Externalities in production (a) external costs
External costs in production
Costs and benefits
MC = S
P
D
O
Q1 Quantity
External costs in production
Costs and benefits
MSC
P
MC = S
D External cost
O
Q2 Social optimum
Quantity
Q1
Externalities
Externalities in production (b) external benefits
External benefits in production
Costs and benefits
MC = S
P
O
D
Q1 Quantity
External benefits in production
Costs and benefits
MC = S MSC
External benefit P
O
D
Q1 Quantity
Q2
Social optimum
External costs and benefits in production
D
P External cost
O
Q2
Q1
Quantity
(a ) External costs
MC = S MSC Costs and benefits (£)
Costs and benefits (£)
MSC MC = S
External benefit P
O
D
Q1
Q2
Quantity
(b) External benefits
Externalities
Externalities in consumption (a) external costs
Costs and benefits
External costs in consumption
P
D
(MB) MU = D
O
Q1 Quantity
Costs and benefits
External costs in consumption
External cost
P
D
(MB) MU = D MSB O Social optimum
Q2
Q1 Quantity
Externalities
Externalities in consumption (b) external benefits
Costs and benefits
External benefits in consumption
P
D
(MB) MU = D
O
Q1 Quantity
External benefits in consumption
Costs and benefits
External benefit
P
D MSB (MB) MU = D
O
Q1 Quantity
Q2
Social optimum
External cost P
P
Costs and benefits (£)
Costs and benefits (£)
External costs and benefits in consumption
External benefit
P
P MSB MB
MB MSB O
Q2
Q1 Car miles
(a ) External costs
O
Q1
Q2
Rail miles
(b) External benefits
Externalities
Using taxes to correct for an externality (a) external cost in production
Using taxes to correct a market distortion
Costs and benefits
MC = S
P
D
O
Q1 Quantity
Using taxes to correct a market distortion
Costs and benefits
MSC
P
MC = S
D External cost
O
Q2 Social optimum
Quantity
Q1
Using taxes to correct a market distortion
Costs and benefits
MSC
MC = S
Optimum tax = MSC – MC
P
D
MC
O
Q2 Quantity
Q1
Using taxes to correct a market distortion
Costs and benefits
MSC
P
D
Amount of tax MC
O
MC = S
Q2 Quantity
Q1
Externalities
Using subsidies to correct for an externality (a) external benefits in production
Using subsidies to correct a market distortion
Costs and benefits
MC = S
P
O
D
Q1 Quantity
Using subsidies to correct a market distortion
Costs and benefits
MC = S MSC
External benefit P
O
D
Q1 Quantity
Q2
Social optimum
Using subsidies to correct a market distortion MC = S MSC
Costs and benefits
MC Optimum subsidy = MC – MSC P
O
D
Q1 Quantity
Q2
Using subsidies to correct a market distortion MC = S MSC
Costs and benefits
MC
Amount of subsidy P
O
D
Q1 Quantity
Q2
Externalities
Externalities in production (a) external costs
External costs in production
Costs and benefits
MC = S
P
D
O
Q1 Quantity
External costs in production
Costs and benefits
MSC
P
MC = S
D External cost
O
Q2 Social optimum
Quantity
Q1
Externalities
Externalities in production (b) external benefits
External benefits in production
Costs and benefits
MC = S
P
O
D
Q1 Quantity
External benefits in production
Costs and benefits
MC = S MSC
External benefit P
O
D
Q1 Quantity
Q2
Social optimum
External costs and benefits in production
D
P External cost
O
Q2
Q1
Quantity
(a ) External costs
MC = S MSC Costs and benefits (£)
Costs and benefits (£)
MSC MC = S
External benefit P
O
D
Q1
Q2
Quantity
(b) External benefits
Externalities
Externalities in consumption (a) external costs
Costs and benefits
External costs in consumption
P
D
(MB) MU = D
O
Q1 Quantity
Costs and benefits
External costs in consumption
External cost
P
D
(MB) MU = D MSB O Social optimum
Q2
Q1 Quantity
Externalities
Externalities in consumption (b) external benefits
Costs and benefits
External benefits in consumption
P
D
(MB) MU = D
O
Q1 Quantity
External benefits in consumption
Costs and benefits
External benefit
P
D MSB (MB) MU = D
O
Q1 Quantity
Q2
Social optimum
External cost P
P
Costs and benefits (£)
Costs and benefits (£)
External costs and benefits in consumption
External benefit
P
P MSB MB
MB MSB O
Q2
Q1 Car miles
(a ) External costs
O
Q1
Q2
Rail miles
(b) External benefits
Externalities
Using taxes to correct for an externality (a) external cost in production
Using taxes to correct a market distortion
Costs and benefits
MC = S
P
D
O
Q1 Quantity
Using taxes to correct a market distortion
Costs and benefits
MSC
P
MC = S
D External cost
O
Q2 Social optimum
Quantity
Q1
Using taxes to correct a market distortion
Costs and benefits
MSC
MC = S
Optimum tax = MSC – MC
P
D
MC
O
Q2 Quantity
Q1
Using taxes to correct a market distortion
Costs and benefits
MSC
P
D
Amount of tax MC
O
MC = S
Q2 Quantity
Q1
Externalities
Using subsidies to correct for an externality (a) external benefits in production
Using subsidies to correct a market distortion
Costs and benefits
MC = S
P
O
D
Q1 Quantity
Using subsidies to correct a market distortion
Costs and benefits
MC = S MSC
External benefit P
O
D
Q1 Quantity
Q2
Social optimum
Using subsidies to correct a market distortion MC = S MSC
Costs and benefits
MC Optimum subsidy = MC – MSC P
O
D
Q1 Quantity
Q2
Using subsidies to correct a market distortion MC = S MSC
Costs and benefits
MC
Amount of subsidy P
O
D
Q1 Quantity
Q2
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