Economics 1021A/B Chapter Notes - Chapter 16: Ecotax, Clean Technology, Deadweight Loss

• School: Western University
• Department: Economics
• Course: Economics 1021A/B
• Professor: Emilie Mc Hugh Rivers

Document Summary

An externality is a cost/benefit from an action that falls on someone other than the person or firm choosing the action: Marginal private cost (mc): the cost of producing an additional unit of a good or service that is borne by its producer. Marginal external cost: the cost of producing an additional unit of a good or service that falls on people other than the producer. Marginal social cost (msc): the marginal cost incurred by the producer and by everyone else on whom the costs fall upon. Msc = mc + marginal external cost. If 3 million liters of paint per month is produced, mc=/liter, marginal external cost=sh. 75/liter, msc=. 75/liter. Equilibrium in an unregulated market with external production cost occurs at the quantity produced where mc=msb. At equilibrium, msb < msc, so the market produces an inefficient quantity. With no regulations, the market overproduces and creates a deadweight loss. With property rights, the polluter bears the cost of pollution and abatement.