23115 Chapter Notes - Chapter 10: Pigovian Tax, Coase Theorem, Externality
Externalities II
Externalities also arise in consumption, such as second-hand cigarette smoking and vaccination.
Generally, negative externalities lead markets to produce a large quantity that is socially
undesirable, and a small quantity that is socially desirable, with may be remedied by taxes and
subsidies, respectively.
Government action is not always needed to correct externalities, due to individual solutions of oral
codes and donations, and private market solutions of integration and contracts.
Coase theorem: If private parties can bargain without cost over the allocation of resources, they
can reach agreements or bargains that solve the problem of externalities without government
intervention. Transaction costs include lawyer fees in bargaining.
Command and control policies usually take the form of regulations, such as pollution limits.
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Document Summary
Externalities also arise in consumption, such as second-hand cigarette smoking and vaccination. Generally, negative externalities lead markets to produce a large quantity that is socially undesirable, and a small quantity that is socially desirable, with may be remedied by taxes and subsidies, respectively. Government action is not always needed to correct externalities, due to individual solutions of oral codes and donations, and private market solutions of integration and contracts. Coase theorem: if private parties can bargain without cost over the allocation of resources, they can reach agreements or bargains that solve the problem of externalities without government intervention. Command and control policies usually take the form of regulations, such as pollution limits. Market based policies are used to align private incentives with social ef ciency. Pigovian taxes are enacted to correct the effects of a negative externality: only rms that are willing to pay the tax will pollute.
