ECON 2304 Lecture Notes - Lecture 10: Coase Theorem, Passive Smoking, Ecotax
17 Oct 2016
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In absence of market failures, the competitive market outcome is efficient, maximizes total surplus: externality the uncompensated impact of one person"s actions on the well-being of a bystander. Depends on whether impact on bystander is adverse or beneficial: self-interested buyers and sellers neglect the external costs or benefits of their actions. Public policies from government could fix this. Examples of negative externalities: air pollution from a factory, playing loud music in a dorm, health-risk to other from second-hand smoke. Recap of welfare economics: supply curve shows the private cost directly incurred by the seller. Analysis of a negative externality: external cost. Value of the negative impact on bystanders. The supplier now has to pay the additional cost of the damage to the environment. This leads to the supply curve shifting left due to increase cost of production: social cost = private + external cost. This is the new supply curve: after a negative externality.
