ECON 1201 Lecture Notes - Lecture 13: Artificial Scarcity, Deadweight Loss, Diarrhea
ECON 1201 – Lecture 13 – Externalities
Markets
• Prices reflect the truth about costs
• This is generally true but there are some instances in which this is not the case
General Exceptions to Markets Reflecting “Economic Truth”
• Asymmetric information
o Usually seller knows more about quality of goods and services
o Particularly in healthcare
• When one party has market power and can charge prices above costs
o Monopolist can create artificial scarcity of a good
o i.e. Microsoft, Verizon
• When competitive market prices are not a true reflection of the true costs and benefits
because of what economists call externalities
o The price you pay for a television set must be less than the benefit you receive
▪ The decision gives information about the benefits relative to the costs
What are externalities?
• External costs or external benefits that spill beyond the individuals within the market
• What happens in the marketplace doesn’t stay in the marketplace (non-market
participants)
Negative Externality
• A negative externality refers to when a person or company consumes or produces costs
to a third party yet does not compensate for the harm or damage created
• Classic example: pollution
Positive Externality
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ECON 1201 Full Course Notes
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