ECON 1000 Study Guide - Quiz Guide: Coase Theorem, Salad Bar, Passive Smoking
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ECON 1000 Full Course Notes
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Markets are usually a good way to organize economic activity. In the absence of market failures, the competitive market outcome is efficient, maximizes total surplus. Governments can sometimes improve market outcomes: pollution: a negative externality, example of negative externality: Air pollution from a factory: the firm does not bear the full cost of its production, and so will produce more than the socially efficient quantity, ho(cid:449) go(cid:448)"t (cid:373)a(cid:455) i(cid:373)p(cid:396)o(cid:448)e the market outcome: Internalizing the externality: altering incentives so that people take account of the external effects of their actions. In the previous example, a /litre tax on producers would shift the supply curve for gasoline up by the size of the tax. The new supply curve now coincides with the social- cost curve and qmarket = qoptimum: taxes that internalize negative externalities are called pigovian taxes, after economist. Arthur pigou (1877 - 1959): positive externalities.
