ECO 1104 Chapter Notes - Chapter 10: Deadweight Loss, Cost, Social Cost

• School: University of Ottawa
• Department: Economics
• Course: ECO 1104
• Professor: Gordon Lenjosek

Document Summary

Efficiency: total surplus is maximized at level of production. Negative externalities: any negative spillover cost stemming from a production activity that is imposed on a party other than the decision maker: decision maker does not face external cost, ex. A crack house operating next to a day care: ex. A pulp and paper mill upstream from a fishery: ex. Pollution from factories: pollution and the social optimum. In the presence of a negative externality, such as pollution, the social cost of the good exceeds the private cost. The optimal quantity q optimum, is therefore smaller than the equilibrium quantity, q market: deadweight loss of a negative externality. A negative externality means that the social-cost curve lies above the demand curve at the market equilibrium quantity, qmarket. Dwl: loss in total surplus stemming from pollution. It arises because we are producing at market equilibrium rather than at socially optimal equilibrium.