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An externality is
Technical definition: an externality is an uncompensated impact on a third party. Externalities can be positive or negative. What typically happens when an activity has a small private cost and a large social cost?
Dog poo:
In a market economy, government policy is one way of fixing externality problems. Externalities are the reason for many types of policy suggestions. children on airplanes: mobile phone use: take-out food: global warming:
II. Positive Externalities Give some examples of positive externalities: Think of a positive externality from your life:
Explain how cigarette smoking has both positive and negative externalities associated with it.
III. Dealing with Externalities A. Regulations Explain how regulations can correct externalities.
Explain why taxing behaviors that generate negative externalities can create good incentives.
C. Private Solutions Explain the 3 insights of Nobel Prize winner Ronald Coase: The parties involved in the externality have an incentive to come to an agreement on their own.
The solution will be the same, regardless of who starts with the property right.
IV. Governments are Needed to Make Markets Possible in the First Place Governments are needed to set the rules:
provide infrastructure:
develop institutions:
V. Public Goods Public goods have two characteristics: 1) 2) Explain how the free-rider problem is present in public goods.
Law enforcement:
VI. Governments Redistribute Wealth In order to make markets possible, deal with externalities, and provide public goods, governments need to raise money. What does economics tell us about how income and wealth should be distributed? Explain using Nobel Prize winner Amarty Sens story.
___________________________________________________________________________________ In your own words, summarize the main points of this chapter.