Microeconomics: Theory and Applications with Calculus, 4e

17.4 Market Structure and Externalities

Two of the main results concerning competitive markets and negative externalities—too much pollution is produced and a tax equal to the marginal social cost of the externality solves the problem—do not hold for other market structures. Although a competitive market always produces too many negative externalities, a noncompetitive market may produce more or less than the optimal level of output and pollution. If a tax is set so that firms internalize the externalities, a competitive market produces the social optimum, whereas a noncompetitive market does not.

Monopoly and Externalities

We use the paper mill example to illustrate these results. In Figure 17.5, the monopoly equilibrium, $e_m,$[&e_{m},&] is determined ...