AREC365 Lecture Notes - Lecture 5: Imperfect Competition, Government Failure, Market Failure
21 Sep 2016
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Externalities & public goods -> important concepts in chp. 2. This means if you set long run marginal cost = price, you get losses. Technically, it"s not a market failure per se, but it is very much an adverse problem. De nition: an externality occurs whenever the activities of one person (or economic agent) a ect the welfare or production functions of other people (or economic agents) who have no control over that activity. ex. ) Foundry produces steel, pollute a stream, a ecting a brewery downstream ex. ) Running lawn mower at 7am and wake up the neighbours (spillover cost here) 1. ) external diseconomy (negative) technological externalities should show up in a bene t-cost analysis, the other type should not case of uncompensated costs divergence b/w private and social costs of production (spillover costs) ex. ) pollution. There is an interdependence b/w the brewery and the foundry. This impact is not transmitted through the market price system.
