Chapter+10+Externalities+(Joon,+Scott,+and+Steven)

Key Terms: Externality: The uncompensated impact of one person;s actions on the well-being of a bystander. (In simple words "accident")

Externalities: There are both positive and negative externalities. Here are an example of each. Positive: Colleges stop crime. Crime rates are reduced because people are educated. Colleges were designed to educate people, not reduce crime rates. However, "undesirably" or "accidentally," crime rates decreased due to colleges.

Negative: A factory creates pollution from manufacturing, Pollution negatively effects the people living in that area. Internalizing the externanlity: Altering incentives so that people take account of the external effects of their actions Coase Theorem: The proposition that if private parties can bargan 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.


 * Key Concepts**

-Without government intervention, the market will adjust to its highest effiency -However, imagine the product is oil. -Oil causes a **negative externality** because of the pollution it causes -As a result, government taxes products that cause such negative externalities. -These taxes are called **internalizing the externality** because it alters the incentives to buy more. -Positive externalities however has the opposite effect. -Positive externalities are produced in a smaller quantity then what the society wants. -As a result, the governement will probably try to solve this problem by altering incentives.
 * Externalities and Market Inefficiency**

-An example of a private solution is between two neighbors. -Pretend that Bob, one of the neighbors plays guitar during the night. -The other neighbor, Pegasus is annoyed by his guitar and decides to confront him and offer him money for him to stop. -If Bob agrees to these conditions, then the private solution has been achieved. -The **Coase theorem** clearly represents because in the theory it is said that if private parties can bargain, they can solve the externality on their own. -However, it may not always work due to **transaction costs**. -For example pretend Pegasus and Bob are from different countries that speak different languages. -It is impossible to solve this problem by themselves.
 * Private Solutions to Externalities**

-Governments can solve externalities by creating laws. -For example, there are fines from dropping cigarettes or trash on the floor. -However, it is inevitable that people will be tempted to drop cans and garbage on the floor.
 * Public Policies Toward Externalities**

-Taxes in order to prevent negative externalities are called **corrective taxes** -Economists prefer corrective taxes because it is a way to reduce pollution at a lower cost to society.

-An externality is when group one completes a transaction with group two and it effects the third group who wasn't part of the transaction. -A positve externality is when a positive result comes out to the third group, however it is not produced as much as a negative externality -A negative externality is when a negative result comes out to the third group, however it is produced more then what the society desires. -People affected by an externality can solve through private measures. -The government steps in when people cannot solve an externality privately.
 * Conclusion**

1. Why would it be better to use corrective taxes then to regulate a law? 2. Why is it impossible to completely stop negative externalities? 3. What can the government do to alter peoples tastes?
 * Study Questions**

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 * Sources**