Economics 10a Chapter Notes - Chapter 10: Vertical Integration, Opportunity Cost, Demand Curve

• School: Harvard University
• Department: Economics
• Course: Economics 10a
• Professor: Gregory Mankiw

Document Summary

Chapter 10 economics: externalities: externality: the uncompensated impact of one person"s actions on the well-being of a bystander, negative externality: if the side effect is adverse. Exhaust from automobiles b/c it creates smog; drivers pollute too much, so the government taxes gasoline to reduce the amount that people drive: positive externality: if the side effect is beneficial. The difference of these curves is the cost of the externality: the optimal level of the good with the negative externality is the place at which the demand curve crosses the social-cost curve. Below this, the value of the good to the consumers exceeds the social cost of producing the good. The socially optimal quantity is greater than the quantity determined by the private market: the government can correct the market failure (meaning the distance between qmarket and qoptimum) by internalizing the externality through a subsidy.