CAS EC 101 Lecture Notes - Lecture 7: Drum Kit, Economic Surplus, Social Cost

• School: Boston University
• Department: Economics
• Course: CAS EC 101
• Professor: Saponara

Document Summary

Throughout our discussion of supply-and-demand, we have touted the ability of markets to aggregate individual consumption and production decisions in a way that maximizes total economic well-being. A closer look at that analysis, however, shows that is makes a subtle assumption about individual decisions. When we calculated consumer and producer surplus, we did so by adding up the individual surplus bene ts of each transaction as it a ected the acting consumer or producer. For example, if i bought a burrito for when i was willing to pay , then my individual consumer surplus was , and this amount would be added to the total surplus in the market for burritos. We can imagine my individual decision might have a very negative e ect on my neighbor, who now has to listen to me practice drumming. This is the idea behind externalities, when decisions or actions have an additional cost or bene t for bystanders.