Externalities Chapter 10 Micro

Coase Theorem

If Private Parties can bargain without costs over the allocation of resources, they can solve the problem of externalities on their own.

Example of Private Contract

John and Sue Example

Public Policy Toward Negative Externalities

Negative Externalities: 1. taxing the polluter(pigovian tax) 2. Regulation: limiting pollution 3. Tough Laws on drunk driving 4. Banning Cigarette smoking in public places

Social Benefits

Social Benefits= Private benefits+ External benefits

Social Costs

Social Costs= Private Costs+ External Cost

Negative Externality

When the effect on the bystander is adverse. Lead to uncompensated external costs. ex: factory pollution/ waste/BP Oil Spill/ Nuclear Disaster in Ukraine/ Fukushima Japan/Three mile island PA In Consumption: Passive Smoking/ not showering/playing music loud/ littering/drunk driving

Positive Externality

When the effect on the bystander is beneficial In Production: developing new technology In Consumption: education, Civility Yard Maintenance Vaccination

Tradable Pollution Rights

allows the voluntary transfer of the right to pollute from one firm to another. A firm that can reduce pollution at a low cost may prefer to sell its permit to a firm that can reduce pollution only at a high cost.

Private Solutions to Externalities

1. Education and Morale codes ex: Anti-Smoking and No Texting while Driving campaigns 2. Social Sanctions ex: McDonalds Recycling: Tuna Example 3. Charity Organizations and NGOs 4. Private Contract ex: barking dog/ wind turbine on farms and complaining farmers

Public Policy Toward Positive Externalities

1. Government subsidy/ R&D/ Tax Breaks 2. Public Education or Subsidized Education/ Grans & Scholarships(Boeing and Microsoft 2012) 3. Vaccination(Swine flu vaccination was free) 4. Penalizing Copy Right Violations- Samsung had to pay apple more than half a billion dollars for copying the iphone in 2016

Externality

An externality refers to the uncompensated impact of one person's actions on the well being of a bystander. Externalities cause markets to be inefficient and thus fail to maximize total surplus. They can be positive or negative.