ECON 1B03 Lecture Notes - Lecture 12: Deadweight Loss, Social Cost, Externality

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ECON 1B03 Full Course Notes
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ECON 1B03 Full Course Notes
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Consider the steel market when pollution occurs, the cost to society larger than the private costs of producers. Social cost: included private costs of producers plus the cost to public adversely affected. If the factories do not account for externality, they will overproduce and result in deadweight loss in welfare because real costs outweigh value to society resulting in negative surplus(yellow area) Government internalizes externality: taxes offenders, regulates behaviours, regulate amount of pollution with permits. Education helps those that attend school and all of society benefits from creating an educated population. The social value includes not only the value of education to those who actually go to university, but also the value to the rest of society who benefits. Notice that the deadweight loss is again a triangle. Government can internalize externality by subsidizing production of the good, ie increase the supply.

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