ECO 1104 Chapter Notes - Chapter 10: Oc Transpo, Pigovian Tax, Social Cost

• School: University of Ottawa
• Department: Economics
• Course: ECO 1104
• Professor: Rebekah Owusu

Document Summary

Externality: u(cid:374)(cid:272)o(cid:373)pe(cid:374)sated i(cid:373)pa(cid:272)t of 1 pe(cid:396)so(cid:374)(cid:859)s a(cid:272)tio(cid:374)s o(cid:374) (cid:449)ell-being of a bystander. Go(cid:448)(cid:859)t (cid:396)espo(cid:374)ds (cid:271)(cid:455) t(cid:396)(cid:455)i(cid:374)g to i(cid:374)flue(cid:374)(cid:272)e this (cid:271)eha(cid:448)iou(cid:396) to protect interests of bystanders. Both positive & negative externalities cause market failure in form of an inefficient level of output. *note*: efficiency means that total surplus is maximized @ level of production: e(cid:395)ui(cid:448)ale(cid:374)tl(cid:455), (cid:373)a(cid:396)gi(cid:374)al (cid:271)e(cid:374)efit (cid:894)(cid:272)o(cid:374)su(cid:373)e(cid:396)(cid:859)s willingness to pay for last unit) equals cost of production (cid:894)supplie(cid:396)s(cid:859) (cid:448)aluatio(cid:374) of last u(cid:374)it(cid:895) Implication = presence of an externality, that efficient level of output is not attained. Positive externality: any positive spillover benefit stemming from a production activity that is imposed on a party other than decision maker. Decision maker does not reap external benefit. Construction of a new bridge may lower prices of goods for both users & non-users of bridge. External benefits of educated ppl leads to higher productivity & lower levels of crime, poverty & social unrest.