Chapter 10 Lecture Outline - Economics 101H Vandan Desai...

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Economics 101H Vandan Desai P a g e | 1 Chapter 10: Externalities (Lecture Outline) -------------------------------------------------------------------------------------------------------------------------- Adam Smith’s “invisible hand” of the marketplace leads self-interested buyers and sellers in a market to maximize the total benefit that society can derive from a market But, market failure can still happen I. Externalities and Market Efficiency A. Externality —uncompensated impact of one person’s actions on well-being of bystander B. An externality arises… i. …when one person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect ii. When the impact on the bystander is adverse —negative externality Examples: automobile exhaust, cigarette smoking, barking dogs (loud pets), loud stereos in an apartment building) iii. When the impact on the bystander is beneficial —positive externality Examples: immunizations, restored historic buildings, research into new technologies C. When externalities are involved , equilibrium fails to maximize total benefit to society as a whole and so, market equilibrium is not efficient D. Externalities cause markets to be inefficient , and thus fail to maximize total surplus E. Welfare Economics: A Recap (The Market for Aluminum) i. Supple and demand curves contain important information about costs/benefits ii. Demand curve for aluminum Reflects value of aluminum to consumers , as measured by the prices they are willing to pay At any given quantity, height shows willingness to pay of marginal buyer Shows the value to the consumer of the last unit of aluminum bought iii. Supply curve for aluminum Reflects costs of producing aluminum At any given quantity,
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Chapter 10 Lecture Outline - Economics 101H Vandan Desai...

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