ECON 20A Lecture 12: Externalities and Public Goods
Document Summary
Market are efficient when only buyers and seller are involved in the market. But then other parties get affect i. e when externalities (positive and negative) exist then market outcome is no longer efficient i. e. it no longer maximizes. Market behavior imposes extra cost on a third party. Social cost = private cost + external cost. Ts = cs + ps + surplus (third party) Surplus (third party) - existence of externality. Q opt - socially optimal quantity (i. e quantity that maximizes total surplus) Market over provided the good is compared to the social optimal. Market activity generates extra benefits for a third party. Market underprovided the goods is compared to the social optimal. Social value = private value+ external benefit. If one person is consuming it, others can"t. Ex: others can"t eat the ice cream cone that you"re currently eating. If you can stop someone from consuming a good, then that good is excludability.