Part 2 book “Economics” has contents: Externalities and public goods, the government in the economy - taxation and regulation, markets for factors of production, game theory and strategic play, oligopoly and monopolistic competition, trade-offs involving time and risk, the economics of information, social economics, and other contents. | 9 Externalities and Public Goods How can the Queen of England lower her commute time to Wembley Stadium? Imagine yourself sitting in your economics classroom waiting for the start of class. You are chatting with your neighbors about how free trade might not be so bad after all, and other students are buzzing about the power of the invisible hand as they search for their preferred seats. Your professor strolls in with her usual materials in tow, but something unusual is clutched in her right hand. After setting down her bag, she takes out a match from a matchbox. Confidently, she strikes the match and lights up the cigar in her right hand. One student gasps; another shrieks in delight. Your economics professor is smoking a cigar in class! “Students, welcome to the world of externalities,” your professor says You might ask yourself, how do externalities fit in with the markets we have studied thus far? In short, they don’t. So far in our study of markets, we have focused solely on buyers and sellers, who are the only ones affected by the market transaction. But we know that many times, the actions of one party affect the well-being of countless other parties—like people smoking cigars or factories belching out smoke. In situations like these, the invisible hand may fail to allocate resources efficiently. For instance, many people may suffer from a polluting factory’s emissions without ever benefiting from the production that caused the pollution. CHAPTER OUTLINE Externalities 230 Private Solutions to Externalities Government Solutions to Externalities Public Goods Common Pool Resource Goods EBE How can the Queen of England lower her commute time to Wembley Stadium? KEY IDEAS There are important cases in which free markets fail to maximize social surplus. This chapter discusses three such cases: externalities, public goods, and common pool resources. One common link between these three examples is that there is a difference .
