Economics A170 Chapter Notes - Chapter 10: A170 Road, Coase Theorem, Network Effect
15 May 2020
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Document Summary
What externalities are and why they can lead to inefficiency and government intervention in a market. The difference between negative, positive, and network externalities. The importance of the coase theorem, which explains how private individuals can sometimes solve externalities. Why some government policies to deal with externalities such as emissions taxes, tradable permits, or pigouvian subsidies are efficient, but others like environmental standards are inefficient. Externality: the uncompensated effect of one person"s actions on the well- being of a bystander. Externalities lead to market failure since if the externality was considered more (positive) or less (negative) of such activity would be performed. Negative externality: impact on the bystander is adverse. External cost: an uncompensated cost that an individual or firm imposes on others. Using roads: increased driving leads to traffic which affects other drivers and increased pollution. Manufacturing leads to negative environmental and health effects. Ex: air pollution from burning coal, ground water pollution from fertilizer use.
