EC120 Chapter Notes - Chapter 6: Ecotax, Cost, Externality
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Externality: the uncompensated impact of one person"s actions on the well-being of a bystander. Social cost = private cost (supply graph)+ external cost. Internalizing the externality: altering incentives so that people take account of the external effects of their actions. When market participants pay social costs, market equilibrium = social optimum. In the presence of a positive externality, the social value of a good includes. Private value: the direct value to buyers. External benefit: the value of the positive impact of bystanders. At any lower q, the social value of additional units exceeds their cost. At any higher q, the cost of the last unit exceeds its social value. If negative externality market quantity larger than socially desirable. If positive externality market quantity smaller than socially desirable. To remedy the problem internalize the externality . Requirements that firms adopt a particular technology to reduce emissions.
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