ECON 1115 Lecture Notes - Lecture 3: Marginal Utility, Social Cost, Market Failure

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Class 2
Chapters 1, 3 and 4 Test on Monday
Externality:-
Positive externalities: Society benefits without benefit or compensation
Relation between value and price positively related
For socially optimal output we must have MSB = MSC
Example: Schooling in America
Government can move from Q1 to Q2 by passing law to make going to school
mandatory
Marginal social benefit affects us even if we don’t directly benefit from it,
example: America benefits from everyone being educated with lower crime rates
and better employments rates etc.
Market failure: Schools in America
Quantity too low for marginal efficiency and too low for social efficiency
Relation between cost and price is PERFECT
Paper production example:
If the paper company included all costs (including treating their waste before
dumping it back in the river) it would shift the marginal social cost to the left.
Social welfare is maximised where the new MSC curve intersects with the
Marginal Social Benefit
Same as Marginal Social Cost
P1
Q1
Market
Solution
P2
Q2
Marginal Private Benefit obeys law of diminishing marginal utility
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