ECON 101 Lecture Notes - Lecture 14: Social Cost, Market Failure, Economic Surplus
Document Summary
Examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency: Externality: is a benefit or cost to parties who are not involved in the transaction. Externalities and market failures result from incomplete property rights or from the difficulty of enforcing property rights in certain situations. E. g. a paper company builds its paper mill on privately owned land on the banks of a lake that is owned by the government. In the absence of government regulations, the company will be free to discharge pollutants into the lake. This cost will become external because the firm doesn"t have to pay to clean up their pollution in the lake. This will allow for more than the economically efficient level of paper to be produced, resulting in a negative externality and hence market failure. The effect of externalities: they interfere with the economic efficiency of market equilibrium.
