EC238 Lecture Notes - Lecture 8: Competitive Equilibrium, Market Failure, Externality
Document Summary
Scarcity rent the producer surplus, which persists in the long-run competitive equilibrium externalities as a source of market failure. Externalities exist whenever the welfare of some agent depends not only on his or her activities, but also on activities under the control of some other agent. Exclusivity criteria is violated in the presence of externality. The output of the commodity is too large. The prices of products responsible for pollution are too low. As long as the costs are external, no incentives to search for ways to yield less pollution per unit of output are introduced by the market. Recycling and reuse of the polluting substances are discouraged due to the cheap external cost. Imposes costs on a third party external benefit (external economy) Imposes benefits on a third party pecuniary externalities. Exists when the external effect comes from altered prices. Property right is not the only way of defining entitlements to resource use other possibilities:
