ECON1010 Lecture Notes - Lecture 10: Coase Theorem, Externality, Invisible Hand
Lecture 10 - Externalities
Wednesday, 16 May 2018
10:00 AM
<<Chapter9_slides(1).pptx>>
• A positive consumption externality represents a benefit accrued to someone who is not
involved in the consumption of the good
• Example and graphs in slide show
• Making consumption decisions without accounting for their external benefit doesn't allow for
the maximum social surplus
• Private negotiation is required because 'invisible hand principle' fails
• There is no government intervention, this is called Coase Theorem
• Coase Theorem: If trade in an externality is possible and the following three criteria apply,
bargaining will lead to an efficient outcome regardless of the initial allocation of property
rights
o Small number of parties
o No transaction costs
o Clearly defined property rights
• A negative production externality represents a cost incurred by someone who is not involved
in the production of a given good
• Example and graphs in slide show
• A negative consumption externality represents a cost incurred by someone who is not
involved in the consumption of a given good
• A positive production externality represents a benefit accrued by someone who is not
involved in the production of a given good
Externalities in Large Markets
• When there are many buyers and sellers, Coase Theorem no longer applies
• Taxes and subsidies are used to shift private supply and demand curves to the social supply
and demand curves
• Examples and graphs in slide show
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