ECON 2101 Lecture Notes - Lecture 2: Excludability, Kyoto Protocol, Coase Theorem
5 Apr 2016
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Document Summary
Externalities cause markets to be inefficient (market failures) and fail to maximize total surplus. An externality is an unintended byproduct of some other action by a buyer/seller. When the impact on the bystander is adverse = negative externality (pollution) Positive impact = positive externality (immunizations,r&d/research and development) -negative causes market to produce greater quantity than desired. Producers of pollution do not pay for the damages - costs shifted to third parties decision causes a divergence between optimal outcome and firm"s. Negative externality - the socially optimal outcome (intersection b/w societal-cost curve and demand curve) is less than the market equilibrium outcome - societal-cost curve is inside/left of supply curve. Internalizing an externality - altering incentives so that people account for externalities patent laws pollution. Subsidies and industrial policy to internalize a positive externality - Charities that deal with externalities, also moral codes/sanctions. Integrating firms - merging a polluting firm and a firm suffering from.
