CAS EC 101 Lecture Notes - Lecture 14: Acid Rain, Ronald Coase, Demand Curve

• School: Boston University
• Department: Economics
• Course: CAS EC 101
• Professor: Michael Manove

Document Summary

A rational self-interested agent undertaking an economic activity considers the effect of the activity on his own welfare and the agent reacts to the market price in order to maximize his welfare. You buy when your wtp > p, but you don"t buy when wtp < p. Unfortunately, an agent may not consider the direct effects of his activities on other people. The direct effects of an agent"s activities on other people are called externalities. Because of externalities, an agent may act against the interests of society. I plant a flower garden for myself, but people on my street enjoy looking at it. I rent my apartment to noisy students who annoy the neighbors. I drive my car and create more traffic. These effects are not considered when the agent reacts to the market price. Students arrange a concert for themselves on the bu beach. Bob, in a nearby office is trying to work.