ECON 1000 Lecture Notes - Lecture 10: Market Failure, Demand Curve, National Order Of Quebec
16 Nov 2016
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Document Summary
Have argued market outcome is efficient as it maximizes total surplus. But focuses only on participants in the transaction. Suppose a 3rd party is affected by the transaction . Arises when a person engages in an activity that influences the well-being of a bystander but neither pays nor receives compensation for the effect. Supply curve shows cost of production to firms. With no government intervention price adjusts so qs = qd. Call these market price (p market) and quantity (qmarket). In absence of market failure this outcome maximizes ts. Suppose aluminum factories emit pollution which has an adverse effect on bystanders. Call this adverse effect the external cost. Now cost to society is greater than cost to aluminum producers. Social cost = private cost + external cost. Bsp chooses optimal quantity (qoptimum) where social cost curve crosses demand curve. Above this level social cost of additional aluminum exceeds value to consumers. This is optimal amount from society"s standpoint.
