EC120 Lecture Notes - Lecture 18: Deadweight Loss, Social Cost, Externality
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EC120 Full Course Notes
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The market failures examined fall under a general category called externalities. Externality: the uncompensated impact of one person"s actions on the well-being of a bystander: two types: Positive externalities: pleasure from neighbour"s beautiful garden. The government responds by trying to influence this behavior to protect the interests of bystanders. The smoke creates a health risk for those who breathe the air; it is a negative externality. Private cost only the cost of inputs/workers. Social costs bigger than private cost. Private cost + price of pollution: the distance is the cost of pollution. If the producer is left to product without needing to look at their effects, they"ll produce to ensure their equilibrium. If the market is left unregulated, the producer will produce as much as they want, they"ll pollute as much as they want. Note: equilibrium quantity of aluminum q-market is larger than the socially optimal quantity, q-optimum.
