ECON 1000 Lecture Notes - Lecture 14: Pareto Efficiency, Equilibrium Point, Social Cost

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Econ 1000 week 8 lecture 14. 2 cases when markets fail: when there is too much market power, like a monopoly. Social cost = private cost + external cost. The market equilibrium, is the original equilibrium point (point of intersection) on a supply and demand chart. Market equilibriums are generally not social optimum. Social optimum is when the marginal cost is the same as the private cost. Social cost is when the marginal cost is the external cost added to the private cost. The new equilibrium point with the social cost curve becomes the social optimum point. The net welfare loss is the triangle between the two equilibrium points lined up on the q axis. Self-interest leads to a pareto optimal market, sometimes. The elasticity of the social cost curve depends on the elasticity of both demand and supply. Negative externality is where the bystanders or consumers suffer the social cost.

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