Chaper+10+-+Micro

=Chapter 10 - Externalities= http://www.cartoonstock.com/newscartoons/cartoonists/pto/lowres/pton81l.jpg
 * Externality: the uncompensated impact of one person's actions on the well-being of a bystander**

Two types of externalities: **Positive** and **Negative**
ex) recreating historical buildings = gives pleasure to those that walk by ex) factories that produce cars and other goods = produces pollution
 * A positive externality gives an impact that is beneficial to a bystander
 * A negative externality gives an impact that is not beneficial to a bystander

These Externalities affect the Market
http://ingrimayne.com/econ/resouceProblems/Figure14.3.gif http://increasing-returns.blogspot.com/2007/02/blogs-as-positive-externality.html
 * Internalizing he externality: altering incentives so that people take account of the external effects of their actions**
 * A Negative Externality creates an optimum price that is higher than the equilibrium price with an optimum quantity that is lower that the equilibrium quantity
 * A Positive Externality produces an optimum price that is higher than the equilibrium price, but also an optimum quantity that is higher than the equilibrium quantity

Private Solutions
Problems with externalities can be solved in many ways that do not need the government to intervene:
 * 1) Moral codes and social sanctions
 * 2) Charities
 * 3) Reliance on self-interest of the relevant parties
 * 4) Entering contracts

http://nobelprize.org/nobel_prizes/economics/laureates/1991/coase.jpg Private contracts are successful and the **Coase Theorem** explains why By comparing the benefit that each sides of the issue, the two can come to a solution:
 * Coase Theorem: the proposition that if private parties can bargain without cost ofver the allocation of resources, they can solve the problem of externalities on their own**
 * If the benefit of one side is lower than the incentives that the other side offers, it is best that they take the incentive
 * If the benefit of one side is higher than the incentives that the other side offers, it is best to just stick to whatever is benefiting them and not take the incentives

Private Solutions do not always work
These Private Solutions do not always work though and need the government to step in Because the Coase Theorem is based on a society where coming to and following a solution is never a problem, it is sometimes impossible for the theorem to apply in the real world Sometimes, to reach a solution, a **transaction cost** is needed ex) translator
 * Transaction cost: the costs that parties inucr in the process of agreeing to and following through on a bargain**

http://agonist.org/files/active/1/smokestack-by-mhaithaca.thumbnail.jpg

Public Policies for Externality Problems
There are many ways for the government to intervene and try to solve the problem
 * Regulation: allowing or forbidding a certain action (legal or illegal)
 * Corrective Taxes and Subsidies: taxing those that are making a negative externality and subsidizing those that are making a positive externality
 * Corrective Tax: a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality**
 * Tradable Pollution Permits: setting a certain quantity of pollution allowed