1. Session 8 Externalities © 2002 by Nelson, a division of Thomson Canada Limited Lectured by Prof. Dr. Ferdinand D. Saragih, MA

11. Figure 10-1: The Market for Aluminium Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 10: page 0 Quantity of Aluminium Price of Aluminium Demand (private value) Supply (private costs) Equilibrium Q market

15. Figure 10-2: Pollution and the Social Optimum Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 10: page Supply (private costs) 0 Quantity of Aluminium Price of Aluminium Demand (private value) Equilibrium Q market Social costs Q optimum Cost of pollution Optimum

17. Figure 10-3: Deadweight Loss of a Negative Production Externality Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 10: page 0 Quantity of Aluminium Price of Aluminium Social costs Demand (private value) H D + A + E D + A + E - H A + B + C + H A + E E - (B + C + H) - (A + B + C) D A + B + C + D P optimum Q optimum P market Q market a b Total surplus Producer surplus Consumer surplus Change At Q Optimum At Q Market D A B C E F G H

20. Figure 10-4: Technology Spillovers and the Social Optimum Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 10: page 0 Quantity of Robots Price of Robots Demand (private value) Supply (private costs) Optimum Social costs a b Q optimum P optimum Q market P market Equilibrium Value of technology spillover Deadweight loss

25. Figure 10-5: Consumption Externalities Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 10: page (a) Negative Consumption Externalities (b) Positive Consumption Externalities Price of Alcohol Quantity of Alcohol 0 0 Social value Demand (private value) Supply (private cost) Quantity of Education Price of Education Social value Demand (private value) Supply (private cost) Q market Q optimum Q optimum Q market

35. Figure 10-6: The Equivalence of Pigovian Taxes and Pollution Permits. Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 10: page (a) Pigovian Tax (b) Pollution Permits Price of Pollution Quantity of Pollution 0 Quantity of Pollution 0 Pigovian Tax P 1. A Pigovian sets the price of pollution… 2. … which together with the demand curve, determines the quantity of pollution… Demand for pollution rights Q Supply of pollution permits 1. … Pollution permits set the quantity of pollution… Q 2. … which together with the demand curve, determines the price of pollution… Demand for pollution rights P

38. The End Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition Chapter 10: page