BUSAD 120 Chapter Notes - Chapter 7: Social Cost, Externality, Boogie 2Nite
Document Summary
A benevolent social planner who aims at maximising total surplus would produce quantity. For each unit above qoptimum the cost (to society) of producing that unit is larger than benefit of consuming that unit. The welfare cost (or loss in total surplus to society) of the externality is the area of the triangle abc. That is why we say that the market fails. And it fails because producers take into account only their private costs of production and not the costs they impose on bystanders. Internalising the externality: altering incentives so that people take into account the effects of their actions. One solution is to introduce a tax on each unit of aluminium sold (i. e. a per unit tax on aluminium sellers) We have a positive externality in production when an activity yields benefits on third parties. And the latter do not compensate the producer for generating such benefits. An example: the market for industrial robots.
