ECON 201 Midterm: Term Test 2 - Fall 2017
Document Summary
Externalities: a type of market failure, assumption that transaction only affects buyers and sellers is untrue if externalities exist in the market, externality definition: situation where market activity affects a third party. Impact from an externality can be positive or negative, which are called external benefit or cost. Curves for marginal benefit/cost: demand curve = private marginal benefit (pmb) = social marginal benefit (smb, supply curve = private marginal cost (pmc) = social marginal cost (pmc, example . Q: from perspective of society, society would want smc = smb. The price at qbest would then equal : graph of a positive externality. Also, in this case qbest > q* A tax will shift q* to qbest as shown by the graph. In order for this to work out, you want the tax to equal the exact amount of the externality: example: flu shots. If external benefit is per shot : what is qbest (optimal quantity)
