ECO101H1 Chapter Notes - Chapter 17: Gasoline, Marginal Cost, Marginal Utility
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ECO101H1 Full Course Notes
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Pollution is a negative externality (i. e. co2 released from factories/cars/trucks etc. Polluting firms who are profit maximizers do not regard a clean environment as a scarce resource (fail to consider the full costs of using this resource when producing their product). When there are negative externalities, social marginal cost exceeds private marginal cost because the act of production generates costs for society that are not faced by the producer. By producing where mcp = d, the firm ignores the social cost and thus the. Internalizing the externality: a process that results in a producer or consumer taking account of a previously external effect. The socially optimal level of output is at the quantity for which all marginal costs, private plus external, equal the marginal benefit to society. Mec is generally hard to calculate (i. e. pollution damage is often widespread over hundreds of thousands of km2 and can affect millions of people.
