ECON 1000 Lecture Notes - Lecture 15: Free Rider Problem, Passive Smoking, Influenza Vaccine

• School: York University
• Department: Economics
• Course: ECON 1000
• Professor: Avi Cohen

Document Summary

Externality cost of benefit from economic activity affecting people bit not part of the original activity. Too many products and services with negative externalities (second-hand smoke, pollution, traffic jams) Too few products and services with positive externalities (vaccinations, education: cap-and-trade system limits quantities of emissions businesses can release into environment. Government auctions off pollution permits to highest bidders. Total quantity of emissions allowed by permits = emissions target. Carbon taxes set price of emissions and the market adjusts quantities. Cap-and-trade systems set quantities and the market adjusts prices. Efficient outcomes with externalities: when there are externalities, efficient policy rule is: Marginal social cost = marginal social benefit: marginal social cost (msc) = marginal private cost (mc) plus marginal external cost. Marginal external cost = price of preventing or cleaning up damage to others external to original activity: marginal social benefit (msb) = marginal private benefit (mb) plus marginal external benefit.