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Lecture 7

ECO105Y1 Lecture Notes - Lecture 7: High-Occupancy Vehicle Lane, Social Cost, Externality

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Adam Cohen

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1/7/2019 1/7/19 Notes - Google Docs 1/1
not covering Micro Ch 12 in class
externalities occur when clear property rights are missing
when externalities exist, prices don’t reflect all social costs and benefits, and markets fail
to produce efficient outcomes
markets produce too many products/services w negative externalities
(second hand smoke, pollution, traffic jams)
markets produce too few products and services w positive externalities
(vaccinations, education)
marginal external benefit = 0 when marginal private benefit equals marginal social
benefit (demand)
increasing marginal private cost (MC) = caused by diminishing returns
in the table on the Pulp Market slide, the diff btwn marginal private cost and
marginal social cost = $30 marginal external cost = $30
private market value/equil outcome: produce 4 units bc MB = MC
efficient market outcome: produce 3 units bc you include marginal social
cost in this calculation
comparing to private market outcome, the PMO produces too
much at too low of a price
internalize the externality: transform external costs into costs the producer must pay to
the govt
video clip from CBC from Chris Ragan about a tax/tolls on roads
need more infrastructure and investment in infrastructure -- wont solve the
congestion problem on the roads
but to improve mobility, Ragans proposing more tolls
ex: Toronto -- can convert an HOV lane to hot lane/high occupancy or
toll lane
every city needs diff policies for diff cities though
Ragan wants feds to invest in these pilot projects -- argues that if you dont
impose the tax, youre already paying for the congestion through higher
transportation cost, time costs, etc.
public goods are usually provided by govt bc ppl dont need to pay for it to benefit from it
(ex: national defense, building lighthouses -- its impt and sig for all, but if you can reap
the benefits for free, its dumb of you to pay for it)
w positive externalities, smart social quantity of output is at intersection of marginal
social benefit and marginal social cost curves
subsidy = negative tax giving money to places like schools, etc
subsidies for the public good: when there are positive externalities, govt
subsidies can get everyone to voluntarily choose the socially best quantity of
output where marginal social benefit equals marginal social cost
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