ECON 2010 Lecture Notes - Lecture 15: Salad Bar, Pigovian Tax, Passive Smoking
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ECON 2010 Full Course Notes
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In absence of market failures, the competitive market outcome is ef cient, maximizes total surplus. Externality: uncompensated impact of one person"s actions on the well-being of a bystander: negative, positive. Self-interested buyers and sellers neglect the external costs or bene ts of their actions, so the market outcome is not ef cient. In presence of externalities, public policy can improve ef ciency. Late-night stereo blasting form the form 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. Internalizing the externality: altering incentives so that people take account of the external effects of their actions. In our example, the /gallon tax on sellers makes sellers" costs = social costs. When market participants must pay social costs, market eq"m = social optimum. (imposing the tex on buyers would achieve the same outcome; market q would equal optimal q. )
