Chapter+10+Externalities+JBS

=**Chapter 10 Externalities JBS **=

 ** Key Terms **
**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 people take account of the external effects of their actions


 * 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


 * Transaction Costs**: the costs that parties incur in the process of agreeing to and following through on a bargain


 * Corrective Tax**: a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality

**Positive Externality**
  Education provides essential values for young people to become important factors of this society to lead the development and progress for the "bright" future.
 * Occurs //when the effects of a decision not taken into a count by the decision-maker are beneficial to others//.
 * Marginal Social Cost (all marginal cost from society) < Marginal Private Cost
 * Price ↑ Quantity ↑
 * Example: //Education//

Negative Externality
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 * Occurs when //the effects of a decision not taken into account by the decision-maker are detrimental to others//.
 * Marginal Social Cost (all marginal cost from society) > Marginal Private Cost
 * Price ↑ Quantity ↓
 * <span style="font-family: Tahoma,Geneva,sans-serif; font-size: 13px; line-height: 19px;">Example: Pollution, Noise from neighbor

<span style="color: #800000; font-family: Tahoma,Geneva,sans-serif;">Coase Theorem
<span style="font-family: Tahoma,Geneva,sans-serif; font-weight: normal;">It can be very effective in some circumstances. According to the Coase theorem, //i////f private parties can bargain without cost over the allocation of resources, then the private market will always solve the problem of externalities and allocate resources efficiently.// <span style="font-family: Tahoma,Geneva,sans-serif;">
 * <span style="font-family: Tahoma,Geneva,sans-serif;">**Example:** //Barking Dog//
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Owner pay money to neighborhood or he/she stops keeping dogs.

<span style="color: #800000; font-family: Tahoma,Geneva,sans-serif;">**PRIVATE SOLUTION DOES NOT WORK!**
<span style="font-family: Tahoma,Geneva,sans-serif;">Remedies: **<span style="font-family: Tahoma,Geneva,sans-serif;"> Command-and Control Policies: Regulation Market-Based Policy 1: //Corrective Taxes and Subsidies// Market-Based Policy 2: //Tradable Pollution Permits//

<span style="font-family: Tahoma,Geneva,sans-serif;">2. Subsidy to Consumers <span style="font-family: Tahoma,Geneva,sans-serif;"> 3. Subsidy to Producers <span style="font-family: Tahoma,Geneva,sans-serif;">4. Government Provision <span style="font-family: Tahoma,Geneva,sans-serif;">2. Law Suit <span style="font-family: Tahoma,Geneva,sans-serif;">3. Command-and-control policy <span style="font-family: Tahoma,Geneva,sans-serif;">4. Market-based policy
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Positive Externalities || <span style="font-family: Tahoma,Geneva,sans-serif;">Negative Externalities ||
 * <span style="font-family: Tahoma,Geneva,sans-serif;">1. Coase Theorem (Individual bargaining)
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Property right is clear
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Number of people involved is small
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Bargain cost is negligible
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Example: Barking Dog, Fence
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Vaccination coupons, student loans
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Example: Scholarship
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Pay doctors, research grant
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Example: Public Library
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Free polio vaccination, free education for babies || <span style="font-family: Tahoma,Geneva,sans-serif;">1. Coase Theorem (Individual bargaining)
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Property right is clear
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Number of people involved is small
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Bargain cost is negligible
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Sue the firm - Cost a lot
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Direct Control (CO2)
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Regulation
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Tax on product (CFC tax)
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Tradable Pollution Permit
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Example: Buy 2000 CO2 license -> Use 1000 CO2 and save permit -> Sell left over 1000 CO2 permit to other companies ||

<span style="color: #800000; font-family: Tahoma,Geneva,sans-serif;">Conclusion (Video)
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<span style="color: #ff0000; font-family: Tahoma,Geneva,sans-serif;"> Bibliography: <span style="font-family: Tahoma,Geneva,sans-serif;">http://www.mnstate.edu/economic/PhotosImages/PhotoPage/Positive%20Externalities.jpg http://www.youtube.com/watch?v=Ze-UF-3TDRg&feature=player_embedded http://www.youtube.com/watch?v=IJ-ZyRlm4jU&feature=player_embedded