ECO 211 Chapter Notes - Chapter 9: Rush Hour, Energy Star, Externality

• School: University of Miami
• Department: Economics
• Course: ECO 211
• Professor: Dr.Spigelman

Document Summary

Externality--occurs when an economic activity has either a spillover cost or a spillover benefit on a bystander (ex: pollution) Negative externalities present means market equilibrium is no longer efficient, it imposes additional cost on society not explicitly recognized by the buyers & sellers. To compute efficient outcome, shift supply curve to take account of negative externalities or external costs. Marginal social cost--marginal cost + marginal external costs. Quantity demanded & supplied decreases because now cost/price is greater; therefore, if left alone, markets produce too much when there is a negative externality. Positive externalities are spillover benefits, such as education: Ma(cid:396)ket e(cid:395)uili(cid:271)(cid:396)iu(cid:373) (cid:449)ith positi(cid:448)e (cid:271)e(cid:374)efits is(cid:374)"t so(cid:272)ially effi(cid:272)ie(cid:374)t, u(cid:374)de(cid:396)p(cid:396)odu(cid:272)tio(cid:374) of good (i. e. education) happens, leading to deadweight loss. Marginal social benefit--marginal benefit + marginal external benefit. Pecuniary externalities--occurs when a market transaction affect other people only through market prices, market price correctly reflects society-wide impact of market transactions. When there are negative externalities, free markets produce & consume too much.