Ch18 - Chapter 18 Externalities and Public Goods CHAPTER 18...

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Unformatted text preview: Chapter 18: Externalities and Public Goods CHAPTER 18 EXTERNALITIES AND PUBLIC GOODS TEACHING NOTES This chapter discusses the remaining types of market failure which were introduced at the end of Chapter 16, and which were not covered in Chapter 17. Section 18.1 defines the concept of externalities, both positive and negative. Section 18.2 discusses methods of correcting for the market failure that arises in the presence of externalities. These two sections give a good self-contained overview of externalities as a type of market failure. The next two sections, 18.3 and 18.4, explore the relationship between the existence of externalities and property rights. Section 18.5 discusses public goods and section 18.6 offers a brief discussion of determining the optimal level of the public good to provide. Overall the chapter provides a good solid overview of some very interesting problems. Any instructor who had the time and desire to expand upon the presentation in the chapter could find a wealth of information by consulting an environmental or resource economics textbook. There are an abundance of examples related to pollution or natural resource issues that you could choose to talk about. Check your local newspaper for ideas. The consumption of many goods involves the creation of externalities. Stress the divergence between social and private costs, and the difference between the private (industry competitive) equilibrium and the socially optimal (efficient) equilibrium. You can use the students’ knowledge of consumer and producer surplus to explore the welfare gain of moving to the efficient equilibrium. Exercise (5) presents the classic beekeeper/apple-orchard problem, originally popularized in Meade, “External Economies and Diseconomies in a Competitive Situation,” Economic Journal (March 1952). Empirical research on this example has shown that beekeepers and orchard owners have solved many of their problems: see Cheung, “The Fable of the Bees: An Economic Investigation,” Journal of Law and Economics (April 1973). One of the main themes of the law and economics literature since 1969 is the application of Coase’s insight on the assignment of property rights. The original article is clear and can be understood by students. Stress the problems posed by transactions costs. For a lively debate, ask students whether non-smokers should be granted the right to smokeless air in public places (see Exercise (4)). For an extended discussion of the Coase Theorem at the undergraduate level, see Polinsky, Chapters 3-6,...
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Ch18 - Chapter 18 Externalities and Public Goods CHAPTER 18...

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