EC120 Chapter Notes - Chapter 10: Demand Curve, Externality, Coase Theorem
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EC120 Full Course Notes
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Externality the uncompensated impact of one person"s actions on the well-being of a bystander. Negative externality the impact on the bystander is adverse. Buyers and sellers neglect the external effects of their actions when deciding how much to demand or supply, the market equilibrium is not efficient when there are externalities. Why externalities cause markets to allocate resources inefficiently. The social-cost curve is above the supply curve because it takes into account the external costs imposed on society by aluminum production. The planner would choose the level of aluminum production at which the demand curve crosses the social-cost curve. Q (market) > q (optimum) the market equilibrium reflects only the private costs of production. * internalizing the externality alter incentives so that people take account of the external effects of their actions. The tax would shift the supply curve for a product up by the size of the tax. The social value of the good > the private value.
