Chapter+9+(JEM)+-+Externalities

__**Externality**__

- The uncompensated impact of one person's actions on the well-being of a bystander. - If beneficial, it is refered to as **positive externality -** If the impact is advers, it is refered to as **negative externality**

Examples: - air pollution caused by automobiles (negative externality) - a musician performing on the street and attracting more people (positive eternality)



By internalizing the externality, as in taxing the causes of negative externality and in subsidizing the causes of positive externality, the government can take care of the problems of the externalities.

The externalities does not always require governmental procedures to be solved, but can be solved privately through: - moral codes and social sanctions - charities - self-interest - contracts

Also, if the private parties can bargain without the cost over the alloction of resources, they can solve the problems of externalities on their own - **Coase Theorem**. However, such is not always the case because there are definitely, the **transaction cost**, the cost that parties incur in the process of agreeing nd to and following through on a bargain.

As a result, government intervention takes place. - **Regulations**: imposing laws against certain actions - **Corrective taxes**: also known as //Pigivian Taxes//, it is used to internalize the externality instead of regulations. - **Tradable Pollution Permits**: i.e. Kyoto Protocal &

Quiz....WOW! 1)Define externality. 2)Negative externalities make _______ curve to shift upward; Positive externalities make _________ curve to shift upward. (generally from private to social values) 3)A theorem that says if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own is? 4)Why private solutions do not always work in real world? 5)Which kind of limit is this description referring to? a) A tax sets the price of pollution which, together with the demnad curve, determines the QUANTITY of pollution. b) A permit that sets the quantity of pollution which, together with the demand curve, determines the PRICE of pollution.

1)The uncompensated impact of one person's actions on well-being of a bystander 2)Supply, Demand 3)Coarse Theorem 4)Transaction costs (costs that incur in the process of agreeing to and following through on a bargain) come between parties 5) a)Corrective Tax; b) Pollution permits