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

• School: McMaster University
• Department: Economics
• Course: ECON 1B03
• Professor: Hannah Holmes

Document Summary

Sometimes there are benefits and costs that arise in the market that go uncompensated. A positive externality: a benefit that is enjoyed by society that society didn"t have to pay to receive it. 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.