ECO100Y5 Lecture Notes - Lecture 5: Social Cost, Economic Surplus, Externality

• School: UTM
• Department: Economics
• Course: ECO100Y5
• Professor: Michael H O

Document Summary

Externality: benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service: ex. Consumers use gas, which affects pollution, a negative externality. Externalities interfere with economic efficiency of the market equilibrium. Competitive market achieves economic efficiency by maximizing the sum of consumer surplus and producer surplus, but only true if no externalities in production/consumption. Causes difference between private and social cost, or private/social benefit of consuming. Private cost: cost borne by producer of a good or service. Social cost: total cost of producing a good or service, equal to private + external cost. Without externality, private cost = social cost. Private benefit: benefit received by the consumer of a good or service. Social benefit: total benefit received from consuming a good or service: equal to private benefit if no external benefit.