Externalities: Problems and Solutions

2. Externalities: Problems and Solutions Chapter 5 5.1 Externality Theory 5.2 Private-Sector Solutions to Negative Externalities 5.3 Public-Sector Remedies for Externalities 5.4 Distinctions Between Price and Quantity Approaches to Addressing Externalities 5.5 Conclusion

3. Externalities: Problems and Solutions externality Externalities arise whenever the actions of one party make another party worse or better off, yet the first party neither bears the costs nor receives the benefits of doing so. market failure A problem that causes the market economy to deliver an outcome that does not maximize efficiency.

4. Externality Theory 5 . 1 Economics of Negative Production Externalities

5. Externality Theory 5 . 1 Negative Consumption Externalities

6. Externality Theory 5 . 1 Positive Externalities

7. Private-Sector Solutions to Negative Externalities 5 . 2 The Solution

8. Private-Sector Solutions to Negative Externalities 5 . 2 The Solution Coase Theorem (Part I) When there are well-defined property rights and costless bargaining, then negotiations between the party creating the externality and the party affected by the externality can bring about the socially optimal market quantity. Coase Theorem (Part II) The efficient solution to an externality does not depend on which party is assigned the property rights, as long as someone is assigned those rights.

9. Private-Sector Solutions to Negative Externalities 5 . 2 The Problems with Coasian Solutions The Assignment Problem The Holdout Problem Transaction Costs and Negotiating Problems

10. Public-Sector Remedies for Externalities 5 . 3 Corrective Taxation

11. Public-Sector Remedies for Externalities 5 . 3 Subsidies

12. Public-Sector Remedies for Externalities 5 . 3 Regulation (the “quantity” approach) versus Taxation (the “price” approach)

13. Distinctions Between Price and Quantity Approaches to Addressing Externalities 5 . 4 Basic Model

14. Distinctions Between Price and Quantity Approaches to Addressing Externalities 5 . 4 Multiple Plants with Different Reduction Costs

15. Distinctions Between Price and Quantity Approaches to Addressing Externalities 5 . 4 Multiple Plants with Different Reduction Costs Policy Option 1: Quantity Regulation Policy Option 2: Price Regulation Through a Corrective Tax Policy Option 3: Quantity Regulation with Tradable Permits

16. Distinctions Between Price and Quantity Approaches to Addressing Externalities 5 . 4 Uncertainty About Costs of Reduction

17. Distinctions Between Price and Quantity Approaches to Addressing Externalities 5 . 4 Uncertainty About Costs of Reduction