Create an account
internalizing the externality
altering incentives so that peopel take acouunt of the external effects of their actions
if private parties can bargain without cost over the allocation of resources, they can solve the problems of externalities on their own
the costs that parties incur in the process of agreeing to &following thru on a bargain
a tax designed to induce private decisions makers to take account of the social costs that arise from a negative externality
how does government try to fix the externality
govt. can internalize the externality by taxing goods that have negative externalities &subsidizing goods that have positive externality
impact of ones firms research &production efforts on other firms access to tech. advance.
why private solutions dont always work
sometimes the private solution approach fails because transaction costs can be so high that private agreement is not possible
command and control policy
regulation: making certain behavior forbidden, or making certain behavior req.
market based policy
taxes: imposing a tax on goods w/ negative externality, or implementing a subsidy on goods w/ a positive externality
examples of negative externality
loud barking dogs, air pollution, loud music in apartment building, and littering
tradable pollution permits
voluntary transfer of the right to pollute from one firm to another. pollution permits which results in a new market for these permits. firms that can reduce pollution most easily will be willing to sell their permits for whatever they can get
individuals who dont take into account externalities
as a result goods tend to be under supplied or over supplied to the market. govt.policy may be able to improve the outcome
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