In groups, discuss:

  • What do you know about pricing?
  • How do companies calculate the cost of a good?
  • Why are similar goods sometimes priced differently?
  • Why are goods different prices in different places?

Once again:

  • What is supply and demand?
  • Give a concrete example

What is missing in the supply and demand equation?


Market failure is when pricing mechanism leads to an inefficient allocation of (scarce) resources and loss of economic welfare

Today, we will only consider 2 types of market failure: positive and negative externalities

Externalities are the consequence of an industrial or commercial activity which affects other parties without this being reflected in market prices

  • What is not included in the price of:
    • Cigarettes?
    • Cars?
    • Tree planting?
    • Education?

How can we adjust prices, now that we know their externalities?


Externalities do not have to be about pricing. Any activity that has an unintended impact on a third party can be seen as an externality.


Here is another way to put it:

Exercise 1: In your table groups

  1. Define and give one example of:
  • Private cost
  • Social cost
  • Social benefit

2. Explain 2 positive and 2 negative externalities  in the school. (Social benefit and social cost)


Exercise 2:  In groups of 2

Read one of the following articles, describe it to the class while explaining:

Exercise 3: As a class, we will play Externalities Mystery!

You will be divided into 8 groups of 2 or 3

  • Each group will briefly explain wether the hospital should be built or not, base don their card’s perspective.
  • We will then have small discussions on wether or not the hospital construction should go ahead.
    • What were the reasons for your decision?
    • Why were those reasons more significant than any other reason?
    • What other factors might it depend on?
    • What else might you want to know before making a final choice?


  • Which costs are private costs/benefits, and which are external?
  • Can we put a value on any of these externalities?
  • Who is likely to benefit/suffer the most as a result of the hospital project?

If time:

How is Christmas an externality?

Or spot all the externalities in Dr Seuss’ the Lorax