ECON10004 Study Guide - Final Guide: Coase Theorem, Social Cost, Externality
25 May 2018
School
Department
Course
Professor
Type of market failure
Arises when a person engages in an activity that influences wellbeing of a bystander but they neither
pay nor receives any compensation
Negative or positive
Externalities and market inefficiency:
Social cost > private cost
-
Tax can help to internalise the externality
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Negative externalities in production
Social cost < private cost
-
Eg. technology spillover
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Subsidy can help to internalise the externality
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Positive externalities in production
Moral codes and social sanctions
-
Charities
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Integration of different types of business
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Contracts
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Private solutions to externalities:
Suggests private market can be very effective in dealing with externalities
-
If private parties can bargain without cost over allocation of resources then the private market
will always solve externalities and allocate resources efficiently
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Regardless of initial distribution of rights, private parties can reach a bargain in which
everyone is better off and outcome is efficient
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Coase theorem:
Transaction costs = costs incurred in the process of agreeing and following through on a
bargain
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Bargaining breaks down
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Difficult with large number of parties
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Private solutions do not always work:
Command
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and
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control policies (regulation)
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Corrective taxes and subsidies
○
Tradeable pollution permits
○
Market
-
based
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Public policies on externalities
Externalities
Wednesday, 29 March 2017 11:17 PM
Intro Micro Page 1
Document Summary
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