ECON 208 Lecture Notes - Lecture 22: Coase Theorem, Externality, Marginal Cost

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ECON 208- Lecture 22- Chapter 16 cntd.
Solutions to resolve the problem of the externalities
Private solutions: As long as property rights are clearly assigned, externalities
need not lead to allocative inefficiency
Externalities and the Coase Theorem (Additional Topic)
Private Solutions: The government can use taxes and fines or subsidies
Externalities and the Coase Theorem
If the two sides of an externality—The one causing it and the on suffering it—
can bargain together costlessly, they will produce the allocatively efficient
outcome.
Caveats:
Property rights are not always clearly assigned
When there are many parties involved the transaction costs could be
excessive.
Externalities and Taxes
Example: a polluting firm
With a negative externality, a free market produces too much of the product
With the tax the outcome will be allocative efficient
Externalities and subsidies
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