EC120 Lecture Notes - Lecture 10: Coase Theorem, Externality
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EC120 Full Course Notes
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If the impact on the bystander is adverse, it is called a negative externality. Externality the uncompensated impact of one persons actions on the well- Internalizing the externality alter incentives so that people take account of. Negative externalities lead markets to produce larger quantities than is and if it is beneficial it is called a positive externality the external effects of their actions socially desirable. Positive externalities lead markets to produce a smaller quantity than is socially desirable. To remedy this problem, the government can internalize the externality by taxing goods that have negative externalities and subsidizing goods that have positives externalities externalities. Corrective taxes tend to be more effective than regulations for the reason. Corrective taxes taxes enacted to correct the effects of negative. This theorem basically states that two parties can internally bargain to reach a solution that benefits both sides. The coase theorem says that private economic actors can potentially solve the problem of externalities among themselves.
