ECON 160 Chapter Notes - Chapter 10: Externality, Social Cost, Demand Curve
10 Dec 2016
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Externality: the uncompensated impact of one person"s actions on the well-being of a bystander. Arises when a person engages in an activity that influences the well-being of a bystander but neither pays nor receives compensation for that effect. Negative externality: if the impact of the bystander is adverse. Ex: restored historic buildings, research into new technologies. In the presence of externalities, society"s interest in a market outcome extends beyond the well-being of buyers and sellers, to include the well-being of bystanders who are affected indirectly. Equilibrium not efficient when there are externalities: welfare economics: a recap. The demand curve = measured by the prices consumers willing to pay. The supply curve = cost of producing product. The quantity produced and consumed in the market equilibrium, is efficient in the sense that it maximizes the sum of producer and consumer surplus: negative externalities.
