Wednesday, March 12, 2014

Lead Poisoning as a Negative Externality

The New York Times reports that lead poisoning is on the rise in China.  This is a very sad, but important example of a negative externality.  A negative externality occurs when someone (small children living near the lead-acid battery plant) outside of a market transaction (the production and purchasing of a lead-acid batteries) is negatively affected by the production and purchase of the good or service (such as lead-acid batteries).

Using the supply and demand model presented in class, we see that ignoring the external costs (lead poisoning) results in a greater amount of lead-acid battery produced and consumed than if the market participants were to include the external costs from lead-acid battery production and consumption.  Including the negative externality is the socially optimal solution, which results in a decrease (but elimination) of the good and an increase in the price.

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