Chapter 10: Externalities

Principles of Economics, 4th Edition (Student Edition)

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March 4, 2008 10. EXTERNALITIES Coase theorem the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own corrective tax a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality externality the uncompensated impact of one person’s actions on the well-being of a bystander internalizing the externality altering incentives so that people take account of the external effects of their actions transaction costs the costs that parties incur in the process of agreeing to and following through on a bargain 1. Externalities and Market Inefficiency a. Welfare Economics: A Recap b. Negative Externalities c. Positive Externalities Give an example of a negative externality and a positive externality. Explain why market outcomes are inefficient in the presence of externalities.
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Unformatted text preview: 2. Private Solutions to Externalities a. The Types of Private Solutions b. The Coase Theorem c. Why Private Solutions Do Not Always Work Give an example of a private solution to an externality. What is the Coase theorem? Why are private economic participants sometimes unable to solve the problems caused by an externality? 3. Public Policies toward Externalities a. Command-and-Control Policies: Regulation b. Market-Based Policy 1: Corrective Taxes and Subsidies March 4, 2008 c. Market-Based Policy 2: Tradable Pollution Permits d. Objections o the Economic Analysis of Pollution A glue factory and a steel mill emit smoke containing a chemical that is harmful if inhaled in large amounts. Describe three ways the town government might respond to this externality. What are the pros and cons of each solution?...
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Chapter 10: - 2 Private Solutions to Externalities a The Types of Private Solutions b The Coase Theorem c Why Private Solutions Do Not Always Work

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