Externalities
| English | Chinese | Pinyin |
|---|---|---|
| externality | 外部性 | wài bù xìng |
| negative externality | 负外部性 | fù wài bù xìng |
| third party | 第三方 | dì sān fāng |
| marginal private cost | 边际私人成本 | biān jì sī rén chéng běn |
| overproduces | 过度生产 | guò dù shēng chǎn |
| positive externality | 正外部性 | zhèng wài bù xìng |
| marginal private benefit | 边际私人收益 | biān jì sī rén shōu yì |
| underproduces | 生产不足 | shēng chǎn bù zú |
| Pigouvian tax | 庇古税 | bì gǔ shuì |
| subsidy | 补贴 | bǔ tiē |
| tradable permits | 可交易许可证 | kě jiāo yì xǔ kě zhèng |
The cost you don't pay
- A factory's smoke drifts over a neighbourhood the owner never meets.
- A vaccine protects not just you, but everyone you don't infect.
- These spillovers land on people outside the deal — and the market ignores them.
- Each one is an externality 外部性, and it makes the market produce the wrong amount.
An externality is a cost or benefit that falls on:
The spillover lands on someone outside the buyer-seller deal.
Negative and positive externalities
- A negative externality 负外部性 (pollution) imposes a cost on a third party 第三方. Marginal social cost sits above the marginal private cost 边际私人成本, so the market overproduces 过度生产.
- A positive externality 正外部性 (vaccination) gives others a benefit. Marginal social benefit sits above the marginal private benefit 边际私人收益, so the market underproduces 生产不足.
An externality
A negative externality puts social cost above private cost, so the market overproduces. A tax equal to the external cost restores the efficient quantity.
A good with a negative externality (like pollution) is:
The firm ignores the extra social cost, so it makes more than the efficient quantity.
A good with a positive externality (like vaccination) is underproduced by the market.
Buyers ignore the benefit to others, so the market makes too little.
How governments correct them
- A Pigouvian tax 庇古税 equal to the external cost raises the polluter's private cost to the social cost, cutting output to the efficient level.
- A subsidy 补贴 equal to the external benefit encourages more of a good thing (like education).
- Tradable permits 可交易许可证 cap total pollution and let firms trade the right to pollute, so cuts happen where they are cheapest.
A tax set equal to the external cost of pollution is called a ______ tax.
A Pigouvian tax internalises the externality, cutting output to the efficient level.
Select all tools a government can use to correct externalities.
Taxes, subsidies and permits all make people face the full social cost or benefit.
A worked case
- A factory's private cost of a tonne of steel is 200, but its smoke does 30 of harm to residents.
- So the true social cost is $200 + 30 = 230$; left alone, the factory ignores the 30 and overproduces.
- A Pigouvian tax of exactly 30 makes the factory pay the full 230.
- The tax "internalises" the externality, cutting output to the efficient amount.
A tonne of steel has a private cost of 200 and does 30 of harm to others. What per-tonne Pigouvian tax makes the firm face the full social cost?
The tax equals the external cost, 30, so the firm pays the full social cost of 230.
An externality spills a cost or benefit onto a third party. A negative one (social cost above private) causes overproduction; a positive one (social benefit above private) causes underproduction. Governments fix them with a Pigouvian tax, a subsidy, or tradable permits.