ECON 1201 Lecture 18: Externalities
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Document Summary
Positive externalities: benefit that bystanders receive: electricity generation, education, flu vaccinations. Negative externalities: hurt bystanders: pollution (noise, air, water, congestion) Externalities distort the market outcome: signals aren"t being transmitted to market participants. When people litter have no cost imposed to them but the cost would be imposed on those who did live there or who had to clean it up. Why do externalities exist: incomplete or ill-defined property rights. We can"t have private property rights over the smell of garbage: difficult to enforce property rights (role of transaction costs) Even if rights are clearly owned, it is very costly to enforce those rights. Negative externalities: if it exists and is not corrected, and the government does not correct it -> markets produce too much. Firms decisions are based off of private cost. They don"t take into account the third party costs. Externalities are external costs that the company may not account for.
