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 5 of 19
…
Figure 2 - Pollution
and the Social Optimum
In the presence of a negative externality, such as pollution,
the social cost of the good exceeds the private cost.
The optimal quantity Qoptimum is
therefore smaller than the free market equilibrium quantity Qmarket.
…
Aluminum factories emit pollution.
For each unit of aluminum produced a
certain amount of smoke enters the atmosphere.
This is a negative externality because the smoke causes
health problems.
Because of the externality the cost to
society of producing aluminum is larger than the direct costs for aluminum
producers.
For each unit of aluminum produced, the
social cost includes
· the private costs of the aluminum
producers
· the social costs to bystanders adversely
affected by the pollution
…
Figure 2 shows the social cost curve
above the supply curve.
A benevolent social planner
· wants to maximize society’s total
surplus
· knows the cost of producing aluminum must
include the external costs of pollution
The planner, after subjective
evaluation of how much pollution should be allowed, chooses the level of
aluminum production where the demand curve crosses the social cost curve.
At this intersection, from the
standpoint of overall society costs and well-being
· the optimal amount of aluminum is
produced, Qoptimum
· price of aluminum moves up from A to
B
… …
subjective evaluation
shukan hyōka
主観評価
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