Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 4 The Economics of the Public Sector
Chapter 10 of 36 Externalities
Section 2 of 17
…
Firms that make paper create the chemical dioxin as a manufacturing byproduct.
Scientists have determined dioxin in the environment raises the risk of cancer and other health problems.
In previous chapters we saw
· the forces of supply and demand determine efficient allocation of scarce resources
· the market equilibrium of supply and demand is the price/quantity point of efficient allocation of resources
When the paper market is at natural market equilibrium, should we conclude dioxin emissions are not excessive?
…
Restated from Chapter 1, the ten principles of Economics:
1: people face trade-offs
2: the cost of something is what you give up to get it
3: rational people think at the margin
4: people respond to incentives
5: trade can make everyone better off
6: markets are usually a good way to organize economic activity
7: governments can sometimes improve market outcomes
8: a country's standard of living depends on its ability to produce goods and services
9: prices rise when the government issues too much money
10: society faces a short-run trade-off between inflation and unemployment
…
In this chapter we consider #7: governments can sometimes improve market outcomes.
Here we examine
· why markets sometimes fail to efficiently allocate resources
· how government policies can improve the market outcome
· what kinds of policies work best for improving market outcome
The market failures examined here are in a category of economics called “externalities.”
A negative externality occurs when an action, such as creating dioxin, causes an indirect cost to people other than the producer or consumer.
… …
market failure
shijō no shippai
市場の失敗

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