ECON 101 Lecture Notes - Lecture 18: Coase Theorem, Externality

• School: U of M
• Department: Economics
• Course: ECON 101
• Professor: Ronald C Caldwell

Document Summary

Market failure: failure of a market to reach the e cient outcome (max bene ts to society are achieved. Quantity transacted di ers from e cient quantity (higher or lower) results in a dwl ex: monopoly, externalities. Externality: when the activity of individual/ rm directly impacts another, but this additional cost or bene t is not re ected in the cost unintended impacts not taken into account by the individual decision maker. Source externalities: lack of clearly de ned property rights: if property rights were clearly delineated, then all costs and all bene ts would be accounted for, and compensation for costs will be included in decision-making process. Quantity produced is > e cient quantity for society. Dwl = cost to society - bene ts to producer triangle to the right of e cient q" and b/w mpc and msc. Msc - mpc = mec (marginal external cost.