Externalities - Externalities Chapter 10 Sources of Market...

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Externalities Chapter 10
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Sources of Market Failure Produce the wrong amounts of goods or services due to externalities or ‘spillovers’ Failure to allocate sufficient resources to the production of certain goods, called public’ or ‘ social’ goods
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Externalities Definition : Costs or benefits associated with the production or consumption of a good (or service) that flow on to 3 rd parties outside the market transaction External Costs (Negative Externalities) e.g. pollution from cars, smoke from factories etc External Benefits (Positive Externalities) e.g. development of new technology can also benefit the society as well as the firm concerned Buyer Seller 3 rd Party
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External Costs or Negative Externalities External cost = bf Over allocation of resources Q e equilibrium output Q 0 socially optimal output Society’s loss = cbf Conclusion: When the supply curve fails to include external costs, the equilibrium price is artificially
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