This chapter focuses on an issue that has been in the background since Chapter 1: externalities. The Efficiency Principle states that market equilibrium is efficient, assuming that all of the relevant benefits from consumption and all of the relevant costs of production are included. We now analyze market equilibria in which this assumption is not true. | Externalities and Property Rights Chapter 10 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. 1 1 Learning Objectives Define negative and positive externalities and analyze their effect on resource allocations Discuss and explain the Coase Theorem Explain how the effects of externalities can be remedied and discuss why the optimal amount of an externality is almost never zero Illustrate the tragedy of the commons and show how private ownership is a way of preventing it Define positional externalities and their effects, and show how they can be remedied 2 External Costs and Benefits An external cost is a cost of an activity that falls on people other than those who pursue the activity Also called a negative externality An externality is the name given to an external cost or external benefit of an activity An external benefit is a benefit of an activity received by people other than those who pursue the activity Also called a positive externality | Externalities and Property Rights Chapter 10 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. 1 1 Learning Objectives Define negative and positive externalities and analyze their effect on resource allocations Discuss and explain the Coase Theorem Explain how the effects of externalities can be remedied and discuss why the optimal amount of an externality is almost never zero Illustrate the tragedy of the commons and show how private ownership is a way of preventing it Define positional externalities and their effects, and show how they can be remedied 2 External Costs and Benefits An external cost is a cost of an activity that falls on people other than those who pursue the activity Also called a negative externality An externality is the name given to an external cost or external benefit of an activity An external benefit is a benefit of an activity received by people other than those who pursue the activity Also called a positive externality 3 Externalities Affect Resource Allocation Externalities reduce economic efficiency Solutions to externalities may be efficient When efficient solutions to externalities are not possible, government intervention or other collective action may be used 4 Honeybee Keeper – Scenario 1 Phoebe harvests and sells honey from her bees Bees pollinate the apple orchards No payments made to Phoebe The bees provide a free service to the local farmers Phoebe is giving away a service Private costs are equal to private benefits Social costs are less than social benefits When external benefits exist, maximizing private profits produces less than the social optimum 5 Honeybee Keeper – Scenario 2 Phoebe harvests and sells honey from her bees People at a neighboring school and nursing home are bothered by bee stings The bees are a nuisance to the neighbors Phoebe is not paying all the costs of her honeybees Private costs are equal to private benefits Social costs are greater than social benefits When .
