ECON 101 Lecture 5: ECON 101 - Chapter 5 Notes

8 Pages
Unlock Document

University of British Columbia - Okanagan
ECON 101
Noriko Ozawa

Saturday, October 15, 2016 ECON 101 Chapter 5: Externalities, Environmental Policy, and Public Goods 5.1 Externalities and Economic Efficiency • Externality: a benefit or cost that effects someone who is not directly involved in the production or consumption of a good or service. • e.g. the exhaust from a car creates smog; getting a flu shot; ask a question in class • Two Types of Externalities: 1. Negative Externality 2. Positive Externality • Negative Externalities in Production • e.g. The market for gasoline The Marginal Private Benefit —> Demand Curve The Marginal Private Cost —> Supply Curve • Suppose that oil refineries emit pollution. The estimated cost to society is $1 per unit. • The smoke creates a health risk for those who break the air. • There is a negative externality in the production of gasoline. 1 Saturday, October 15, 2016 Marginal Social Cost: the total cost society pays for the production of another unit or for taking further action in the economy. MSC = MPC + External Cost External Cost: producing or consuming a good or service imposes a cost upon a third party. NOTE: Social Optimum = Efficient Equilibrium Efficient Equilibrium: CS = below demand, above price, up to quantity PS = above supply, below price, up to quantity 2 Saturday, October 15, 2016 • Positive Externalities in Consumption • e.g. The Market for Post- Secondary Education MSB > MPB MSB: Marginal Social Benefit Curve representing the demand after an external benefit is imposed. MPB: Marginal Private Benefit Curve representing the demand before the external benefit is imposed. 3 Saturday, October 15, 2016 Main Finding: An Externality Causes Market Failure • Example 1: Negative Externality in Production • Marginal Social Cost > Marginal Private Cost • The Private Cost is too low and too much output is produced at the market equilibrium. • Example 2: Positive Externality in Consumption • Marginal Social Benefit < Marginal Private Benefit • The Private Benefit is too low and too little output is produced at the market equilibrium. 5.2 Private Solutions to Externalities: The Coase Theorem • The Coase Theorem: when the parties effected by externalities can negotiate costlessly with one another, an efficient outcome results no matter how the law assigns responsibility for damage. • When parties can bargain without cost and to their mutual advantage, the resulting outcome will be efficient regardless of
More Less

Related notes for ECON 101

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.