ECON 200 Chapter Notes - Chapter 10: Normal Good, Coase Theorem, Opportunity Cost
31 May 2016
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Document Summary
Government action can sometimes improve upon market outcomes. An externality arises when a person engages in an activity that influences the well-being of a bystander but neither pays nor receives any compensation for that effect. If the impact on the bystander is adverse, it is called a negative externality. If the impact on the bystander is beneficial, it is called positive externality. Buyers and sellers often neglect the external effects of their actions when deciding how much to demand or supply. Market equilibrium is not efficient when there are externalities. The government often responds by trying to influence behaviors of decision makers to protect bystanders. Each unit of aluminum produced causes a certain amount of smoke to enter the atmosphere. Smoke creates a health risk for those who breath the air. The cost of producing aluminum is larger to society than to aluminum producers: social cost > private cost.
