ECON 111 Lecture Notes - Lecture 10: Coase Theorem, Fire Extinguisher, Passive Smoking
Document Summary
Welfare economics: the study of how the allocation of resources affects economic well-being. Externalities: the uncompensated impact of one person"s actions on the well-being of a bystander. The government responds by trying to influence this behaviour to protect the interests of bystanders. If the effect on the bystander is adverse, we say that there is a negative externality. Late-night stereo blasting from the dorm room next to yours. Health risk to others from second-hand smoke. Talking on cell phone while driving makes the roads less safe for others. Let"s look at a particular example: cindy produces sweaters and pollutes the river during production. Social cost is equal to the private cost to cindy of producing the sweaters plus the external costs to you who enjoys going to a beach on the river. Thus, social cost exceeds the private cost paid by cindy. The optimal amount of sweaters in the market will occur where total surplus is maximized.
