COMMERCE 1B03 Chapter Notes - Chapter 10: Economic Equilibrium, Coase Theorem, Externality
4 Feb 2014
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Externality the uncompensated impact of one person"s action on the well-being of a bystander. Can be negative or positive, depending on whether the impact is adverse of beneficial. Self-interested buyers/sellers neglect external costs/benefits , making market output inefficient. Public policies can improve efficiency in the presence of externalities. Private cost cost directly incurred by sellers (supply curve) Private value value to buyers, and amount they are willing to pay (demand curve) External cost value of negative impacts on bystanders. Social cost private and external costs added together. When market participants must pay social costs, Altering incentives so that producers take account of the external effects of their actions. Negative externality market quantity larger than socially desirable. Private value the direct value to buyers. External benefit value of the positive impact on bystanders. Social value private value and external benefits added together. At any lower quantity, the social value of additional units exceeds the cost.
