An externality is . . .
an uncompensated impact of one person's actions on the well-being of a bystander.
Examples of +ive externatlities
Vaccinations, restored/historic buildings, education . . .
Examples of -ive externalities
Criminal acts, alcohol, pollution, noise pollution . . .
Externalities cause markets to be inefficient because
they fail to maximise total surplus.
-ive externalities cause a - - - Q than is socially desirable.
Cause a larger Q than is socially desirable.
+ive externalities cause a - - - Q than is socially desirable.
Cause a smaller Q than is socially desirable.
Internalising the externality refers to . . .
Altering incentives so that people take account of the external effect of their actions.
Private solutions to externalities are:
Moral codes, charities, self-interest of relevant parties, contracts between parties.
Caose theorem is
If private parties can bargain without cost over the allocation of resources, they can solve the externality on their own.
Private solutions do not always work because of:
Transaction costs, each party may hold out for a better deal, co-ordination problems and the cost when a large number of parties is involved.
Public policies toward externalities:
Corrective taxes and subsidies.
Private goods are:
Both excludable and rival in consumption.
Public goods are:
Neither excludable or rival in consumption.
Common resources are:
Rival in consumption.
Natural monopolies are:
Excludable in consumption.
The Tragedy of the Commons is:
When common resources are used more than is desirable from the standpoint of society as a whole.
Information assymetry is:
A difference in 2 or more parties access to information.
Moral hazard is:
The tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behaviour.
Adverse Selection is:
When the seller knows more than the buyer about the good being sold.
Ways to combat adverse selection:
Signalling and screening.