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Lecture 14

ECON 1000 Lecture 14: Week 8

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ECON 1000
Nick Rowe

Econ 1000 – Week 8 – Lecture 14  2 cases when markets fail o When there is too much market power, like a monopoly. A market will fail when market power is too centralized. o Or when there is only one consumer buying. o Externalities can also lead to market failure o Externality: The private cost (supply curve represents this) also adds an external cause through relation of production.  Social cost = private cost + external cost  The Market equilibrium, is the original equilibrium point (point of intersection) on a supply and demand chart.  Market equilibriums are generally not social optimum.  Social optimum is when the marginal cost is the same as the private cost.  Social cost is when the marginal cost is the external cost added to the private cost.  The new equilibrium point with the social cost curve becomes the social optimum point.  The net welfare loss is the triangle between the two equilibrium points lined up on the q axis.  Self-interest leads to a pareto optimal market, sometimes.  The elasticity of the social cost curve depends on the elasticity of both demand and supply.  Negative externality is where the b
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