EC120 Chapter 10: ec120-ch10-textbook notes
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EC120 Full Course Notes
Verified Note
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Document Summary
Externality: the uncompensated impact of one person"s actions on the well being of a bystander. Arises when a person engages in an activity that influences the well being of a bystander but neither pays nor receives any compensation for that effect. At any given quantity the height of the demand curve shows the willingness to pay of the marginal buyer. It shows the value to the consumer of the last unit of aluminum buyer. The height of the supply curve shows the cost to the marginal seller. It shows the cost to the producer of the last unit of aluminum sold. Because of the externality, the cost to society of producing aluminum is larger than the cost to the aluminum producers. Social cost includes the private costs of the producers plus the costs to those bystanders affected adversely by the pollution. The difference between these 2 curves reflects the cost of the pollution emitted.
