ECON 104 Chapter Notes - Chapter 5: Competitive Equilibrium, Market Failure, Pigovian Tax
21 Apr 2016
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Marginal social benefit and marginal cost give value and cost from social perspective: equate 2 generate socially efficient outcome. Tragedy of commons problem with common resources shared by many people. Markey with negative externality delivers inefficiently high quantity in equilibrium. Pecuniary externalities: influences price but not values or cost: pecuniary externality: positive and negative externalities cancel. Think about externalities in these ways: decision maker ignores some bad or good things that come from decision, missing market (externalities: if they were priced, their value would become private value of decision marker) Make a law, force the firms to produce more efficient quantity: treat missing markets. If a tax is equal to the negative externality (on the margin), it would restore the equivalency of the demand and social value. If a subsidy is equal to negative externality (on the margin), it would restore the equivalency of demand and social value: assign property rights.
