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Chapter 5

ECON 1010 Chapter 5: Topics 29
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3 Pages
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Department
Economics
Course Code
ECON 1010
Professor
Laura K.Brown

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Description
Oc982 ECON1010 In presence of externalities in a large market (smooth private demand and private supply curves), Coases conditions no longer apply. The number of buyers and sellers create high transaction costs as those involved in the market struggle to negotiate with all relevant parties. Government intervention is therefore necessary to fix what the market cannot handle on its own via policies such as taxes and subsidies. SUBSIDY A subsidy equal to the marginal external benefit would shift the private demand curve to the right to the point where the new private demand curve is identical to the social demand curve. The government can affect the market so that the socially optimal quantity is realized. TAX A tax equal to the marginal external cost would shift the private supply curve to left to the point where the new private supply curve intersects the private demand curve.
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