LESSON 12 THIRD-PARTY COSTS AND BENEFITS
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 called
an externality.
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HIGH SCHOOL ECONOMICS 3RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY
LESSON 12 THIRD-PARTY COSTS AND BENEFITS
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
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HIGH SCHOOL ECONOMICS 3RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY
LESSON 12 THIRD-PARTY COSTS AND BENEFITS
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.
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HIGH SCHOOL ECONOMICS 3RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY
LESSON 12 THIRD-PARTY COSTS AND BENEFITS
Positive or Negative Externalities
• Driving a car on crowded highway?
Negative: exhaust fumes, etc.
• Apartment dwellers who buy fire alarms or
fire extinguishers?
Positive: other dwellers benefit
• Neighbor playing loud music while you study?
Negative: you bear cost of not concentrating
• New landscaping in neighbor’s yard?
Positive: increases value of houses in neighborhood.
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HIGH SCHOOL ECONOMICS 3RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY
LESSON 12 THIRD-PARTY COSTS AND BENEFITS
Activity 12.2: Externalities Worksheet
S1
Price
S
P1
P
D
0
Q1
Q
Quantity (Tons of Steel)
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HIGH SCHOOL ECONOMICS 3RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY
LESSON 12 THIRD-PARTY COSTS AND BENEFITS
Activity 12.2: Externalities Worksheet
Price
S
P1
P
D1
D
0
Q
Q1 Quantity (Years of Education)
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HIGH SCHOOL ECONOMICS 3RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY