CAS EC 101 Chapter Notes - Chapter 10: Demand Curve, Social Cost, Economic Surplus

• School: Boston University
• Department: Economics
• Course: CAS EC 101
• Professor: All

Document Summary

Externalities and market efficiency: welfare economics: a recap. In absence of government intervention, prices adjust to balance supply and demand. Is efficient b/c it maximizes the sum of producer and consumer surplus: negative externalities. Planner would choose the level of production at which the demand curve passes the social-cost curve determines the optimal amount from the view of society as a whole. Below this level of production, the value to consumers exceeds social cost planner does not producer more than this level b/c the social cost of producing more exceeds the value to customers. Public policies toward externalities: command and control polices: regulations. Epa: market based policy 1: corrective taxes and subsidies. Corrective taxes: taxes enacted to deal with negative externalities. Ideal tax would equal the external cost from an activity with negative effects. Ideal corrective subsidy could equal the external benefit from the activity with positive externalities. Economist prefer corrective taxes to regulations b/c it cost less to society.