Some economists argue that externalities cause the free market to fail. They say that individuals do not weigh the costs or benefits to society in making decisions; they simply weigh the cost and benefit to them.
If a choice had significant positive external benefits (buying electric cars), the argument would state that individuals do not weigh the benefit to society enough, and therefore the demand curve should move outward on the supply curve to a higher quantity and price. We should be demanding more electric cars, and paying more for our cars.
Likewise, if there is a negative externality (air pollution), consumers should purchase less (automobiles). The impact is to move the supply curve to the left where the quantity demanded will be less, though the price will be higher. The impact on air pollution is not taken into account by individuals in their decision to purchase a car, or more people would take alternative transportation.
What do you think about this idea? Is the market at fault for this imbalance? Why might the market be imbalanced in the first place (hint: are there other factors involved in the current supply and demand equation that we are not considering)?
Is there a way to remedy the situation with market solutions?
Pollution
The book uses the example of an economically acceptable level of pollution that society should accept. What did you think of this section of the reading? Were you swayed by the argument? Why or why not?
Is there a price that is too high to pay to eliminate 1 more unit of pollution from society?
Bring your response back to microeconomics and the family. If a farmer decides to begin raising cows, and the increase in “emissions” from the herd results in your home next door being overridden with bugs, can we measure the socially acceptable cost of this externality?
Can you think of any ways to deal with issues of pollution on the individual?
Endangered Species
A negative externality we see in the world at times is that of the endangered species.
What is the cause of this negative externality?
What are your thoughts about Mr. Hannan’s opinion here about the outcomes of having private ownership of endangered species? (Video link)
If we think of endangered species as something that no one has a financial interest to keep them alive, and in fact many have financial interests to make sure they are not found on their property, are we doing the right thing by protecting them?
Can you equate that problem to other scenarios? How about the way that no one owns the fish in the oceans… is there a financial reason for fishermen to not overfish? Or, could it be that it is in their interest to get as many fish today, because they are not allowed to have ownership over the seas?
