ECON 1B03 Lecture Notes - Coase Theorem, Ronald Coase, Canada Revenue Agency

• School: McMaster University
• Department: Economics
• Course: ECON 1B03
• Professor: Bridget O' Shaughnessy

Document Summary

Unit 5: the economics of the public sector - objective 1: Let us examine negative externalities by highlighting important details from figure 10. 2 on page 208 of the textbook (reproduced here as figure 5. 1): As previously mentioned, the market economy fails to provide the correct amount of some products. The negative externality form of market failure causes an improper allocation of resources because too much of a product may be produced. As seen in the figure above, the correct amount qoptimum is determined by the equilibrium of the social cost curve and the demand curve. The current supply curve is greater than the social cost or social supply curve. The reason for current supply to be higher than socially desired supply is that producers, if not held responsible for pollution costs, would tend to over-supply. This leads to pollution levels that are above safe environmental limits, thereby causing harmful effects on bystanders.