EC120 Chapter Notes - Chapter 10: Invisible Hand, Coase Theorem, Opportunity Cost
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EC120 Full Course Notes
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The uncompensated impact to one person"s actions on the well-being of a bystander. Government regulates the amount of building tear downs to avoid the destruction of such things: barking dogs=negative, research into new technologies=positive. In each case some decision maker fails to take into account the external effects of his behaviour and the government responds by trying to influence this behaviour to protect the interests of bystanders. The height of the demand curve shows the value of the last unit of aluminum bought to a customer. The supply curve height shows the cost to the producer of the last unit of aluminum sold. Due to externalities the cost to society is larger than the cost of to the producers. Therefore for each unit produced the social cost includes the private cost plus the costs to those bystanders affected adversely by the pollution (supply curve shifts up) The new optimum is where the social cost meets the demand (less quantity)
