Microeconomics Chapter 10 Class Notes

Microeconomics Chapter 10 Class Notes - M icroeconomics...

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Point A Microeconomics notes -Chapter 10 Externality Prices are determined by supply and demand, and competitive markets: Allocating Resources efficiently and in some cases do not. At any quantity the height of the demand curve reflects the maximum willingness to pay of some buyers. The height of the supply curve at any quantity shows the opportunity cost incurred by some firms in producing that unit. In competitive markets the willingness to pay of the buyer is showed by the demand curve, while the opportunity cost of the producer is shown by the supply curve. An externality arises when a transaction affects the well being of individuals or firms who do not participate in that transaction. i.e. paper production generating pollution, Harming people living by the paper plant. And suppose people are harmed who do not purchase paper as well. Suppose that each harm is caused by 100$ per ton of paper. Therefore we are assuming that the old supply curve no longer measures the cost of production accurately which the society has to pay for the production. Therefore we come up with a new supply curve which is called Social Cost curve, and it will be set up 100$ above the Previous supply curve.
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