23115 Lecture Notes - Lecture 4: Coase Theorem, Market Failure, Externality
Document Summary
Uncompensated impact on ones person actions on the welling of another. Negative = impact on bystander is adverse (loud music, pollution) Pos = beneficial on bystander (immunisation, research into new tech) True cost = private cost + bystanders affected cost. We need to internalise the externality through tax. Yields benefits on third parties (social cost is lower than supply curve) Subsidy used to shift down the supply curve (opposite to tax) Neg: true value to society is lower than private value. Pos: true value is higher than private value: coase theorem. If private parties can bargain without cost = arguments solved. E. g. moral codes and social sanctions (cid:523)don"t always work(cid:524: regulation. Pigovian taxes = correct taxes to fix negative externalities. Move the allocation of resources towards socially efficient outcome. A tax is more efficient than regulation (achieves target at lower cost: tradeable permits.
