Econ portfolio

Mr. Welker,
I am currently stuck with my Econ analysis. I am having trouble grasping the concept of negative externality. Please read my draft.

I. Abstract
Currently, a number of firms have begun to develop commercially viable cleaner alternate sources of energy, and the article focuses on LiveFuels, which is currently working to create biofuel from algae’s natural photosynthetic ability. Because such ventures are costly, venture capitalists and hedge funds have invested more than $2.4 billion in the clean energy business just last year.

II. Analysis
Although developing cleaner alternate sources of energy on a commercial scale is a costly project, “hundreds, if not thousands” of firms have begun to do so for two major reasons. Firstly, oil prices have surged to “high levels” lately (P1 à P2). As a result, the demand for alternate sources of energy has increased (D à D1). This is because oil is a substitute to alternate sources of energy, and a substitute’s price is one of the product’s determinants of demand, which can shift the product’s demand curve: if substitute’s price increases (P1à P2), the demand for the product will increase (DàD1).

Market for Oil Market for Clean Energy

(graphs ommitted due to temporary malfunctioning of google docs)


Secondly, many are recognizing the negative externalities created by conventional forms of energy (oil). Negative externalities occur when the production or consumption of a good or service adversely affects a bystander, who is neither involved in the production nor the consumption. In the case of oil, its consumption creates pollution. Along with pollution arise a number of problems, which adversely affects society (the bystander): worsening health conditions, global warming, destruction of natural ecosystems, and the diminishing beauty of the environment. These are what create negative externalities, and as a result, the social cost is greater than the private cost and as a result, external costs (faced by society) must be added to existing private costs in order to accurate reflect the full cost faced by society.

Because this is a negative externality of consumption (for consumption of oil creates the negative externality), the marginal social benefit is less than the marginal private benefit. Marginal private benefit is the demand curve based on the benefits consumers face, while marginal social benefit is the demand curve which includes those benefits along with the external costs society faces.
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this is where i got stuck. now according to the packets you gave us, negative externality causes the social cost to increase because the private costs and the external costs must be taken into account in order to determine the full costs of society. THEN, there comes my last paragraph (which I added as an after thought). According to the IB-textbook-whatever packet you gave us, there are four types of externalities, with negative externalities subdivided into two types: one of production and the other of consumption. Now, if its negative externalities of consumption, the text states that the social cost does not increase, but instead the social benefit decreases. Taking these two concepts into account, I am confused. I just can't seem to fit them together. Also, the two just seems so different that it does not make sense that they both refer to negative externalities.

or is this not negative externality of consumption at all? I thought it is the consumption of oil, gasoline by consumers that exacerbates the pollution... did i mistake negative externality of production as consumption? If so how is it not consumption?

as you can see, i am tres tres confused.

i wait thou response
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note to self:
so, the mankiw packet fails to cover negative externalities of consumption. thus, refer to IB handout. negative externalities of consumption. so when talking about negative externalities and defining it, dont talk about it in terms of social cost being greater than private cost. just omit that. instead focus on talking about social benefit being less than private benefit.
oil creates negative externalities of consumption because it is the consumption of oil that creates the pollution. the driving of cars.
so consider: taxing oil. increase prices and it will decrease demand for oil. this will shift the supply curve inwards.
or consider the determinants of demands that will shift the demand in. increase the dangers about oil, increase prices of complements such as cars, etc.
then talk about the positive externality of consumption of clean energy.
then talk about what the government still has to do. (which is essentially what i wrote above.) in addition, the government can subsidize clean energy so that the level of output increases, so that consumers can consume it, and decrease the prices of the clean energy.