HGP250 Lecture Notes - Lecture 8: Invisible Hand, Coase Theorem, Pigovian Tax
24 Sep 2016
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Document Summary
Number of assumptions towards the model does not hold true, one particular one that we are concerned with. Discussing the invisible hand" smith assumed that all costs" of production are included in the calculations of those making decisions. This is not the case -- some costs and benefits are not experienced by the decision makers and are not considered by the decision makers. 1912 - arthur pigou wealth and welfare": distinguished between private benefits and costs and social (public) benefits and costs, named social benefits as positive externalities and social costs as negative. Externalities: suggested that in some cases, governments would need to step in and use subsidies and taxes to ensure that the economy remains efficient, these later became known as the pigouvian taxes and subsidies. Externalities: buyer + seller + third party that is not voluntarily involved, 3rd party somehow impacted by that.
