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ECON 1B03 Lecture Notes - Social Cost, Externality, Deadweight Loss

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Richard Damra Monday, February 4, 2013
Econ 1B03 - Chapter 10
Sometimes there are benefits and costs that arise in the market that go uncompensated.
These are called externalities.
A positive externality: a benefit that is enjoyed by society that society didn’t have to pay to
receive it. E.g receive shade from neighbors tree
A negative externality: a cost suffered by society and the instigator isn’t made to pay for
damage they do. E.g my neighbors dog barks all night + keeps me awake, but she doesn’t
compensate me for the lost sleep
So, externalities: Are created when a market outcome affected people other than the buyers
and sellers in that market.
Cause welfare in a market to depend on more than just the value to buyers and sellers who
actually participate in a market transaction.
Can lead to inefficient markets if buyers and sellers don’t take them (externalities) into account
when deciding how much to consume and produce
Negative externalities lead markets to produce more than is socially desirable.
Positive externalities lead markets to produce less than is socially desirable.
Consider the market for steel: Negative Externalities
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