ECO101H1 Lecture Notes - Lecture 2: Shortage, Market Failure, Allocative Efficiency
![ECO101H1 Full Course Notes](https://new-docs-thumbs.oneclass.com/doc_thumbnails/list_view/2229634-class-notes-ca-utsg-eco-101h1-lecture17.jpg)
98
ECO101H1 Full Course Notes
Verified Note
98 documents
Document Summary
Government regulation how can the government correct for externalities: market based policies. Pigouvian taxes (-ve externality) and subsidies (+ve externality) Tradable pollution permits (cap-and-trade: command and control policies. Tax equal to the marginal external cost at the qoptimum: gives buyers and sellers incentive to take account of their actions, market equilibrium becomes socially optimal outcome. By imposing taxes on the suppliers (or consumers) of a good, marginal costs increase (marginal benefits decrease: internalise the externality -> making implicit costs explicit. A steel plant is currently producing 5000 tons of steel per day for a price of per ton. The production of each ton of steel generates worth of pollution. The steel industry is perfectly competitive with the usual u-shaped cost curves and faces a downward sloping demand curve. For the firm to be fully internalising the cost of externality, it needs to be operating off the smc curve.