101-7_07 - Econ 101 Lecture 7 When all relevant production...

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Econ 101 Lecture 7 When all relevant production costs are incurred by sellers, and when all relevant product benefits accrue to buyers, the market equilibrium price and quantity are socially optimal. Q P D S P* Q* When Smart for One is Dumb for All Production of some goods entails costs that fall on people other than those who sell the good: Goods whose production generates toxic smoke Goods whose production generates noise In the market equilibrium for such goods, the benefit to buyers of the last good produced is, as before, equal to the cost incurred by sellers to produce that good. But since producing that good also resulted in the costs of the associated pollution, we know that the full marginal cost of the last unit produced—the seller’s private marginal cost plus the marginal pollution cost borne by others—must be higher than the benefit of the last unit produced. So market equilibrium quantity > socially optimal quantity. Total economic surplus would be higher if output of the good were lower. Yet neither sellers nor buyers have any incentive to alter their behavior. Increases in production of some goods benefit people other than those who buy them.
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101-7_07 - Econ 101 Lecture 7 When all relevant production...

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