ECON101 Lecture Notes - Lecture 10: Coase Theorem, Economic Surplus, Omnipotence

• School: University of Alberta
• Department: Economics
• Course: ECON101
• Professor: J.Scott Beesley

Document Summary

Externalities and market inefficiency: externality the uncompensated impact of one person"s actions on the well- being of a bystander. If the impact on the bystander is adverse, it is called a negative externality; if it is beneficial, it is called a positive externality. In many cases, some decision maker fails to take account of the external effect of his or her behaviour. The government responds by trying to influence this behaviour to protect the interests of bystanders. In the absence of government intervention, the price adjusts to balance the supply and demand for an item. Negative and positive externalities: we can measure the value of increase in economic well-being using the concept of deadweight loss. Public policies toward externalities: command and control policies regulate behaviour directly, market based policies provide incentives so that private decision makers will choose to solve the problem on their own. Thus, while corrective taxes raise revenue for the government, they also enhance economic efficiency.