EC120 Chapter Notes - Chapter 10: Golden Rule, Environment And Climate Change Canada, Coase Theorem

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17 Oct 2012
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EC120 Full Course Notes
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EC120 Full Course Notes
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We examine why markets sometimes fail to allocate resources efficiently, how government policies can potentially improve the market"s allocation, and what kinds of policies are likely to work best. Externality-the uncompensated impact of one person"s actions on the well-being of a bystander. An externality arises when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect. If the impact on the bystander is adverse, it is called a negative externality; if it is beneficial it is called a positive externality. The market externality is not efficient when there are externalities. Externalities come in many varieties and these are some examples: The exhaust from cars is a negative externality because it creates smog that other people have to breathe. As a result of this externality, drivers tend to pollute too much. The federal government attempts to solve this problem by setting emission standards for cars.