Chapter 10 begins elaborating on a new principle of the Ten Principles of Economics: Governments can sometimes improve market outcomes. Specifically, Chapter 10 examines externalities. An externality arises when a person engages in an activity that influences the wellbeing of a bystander and yet neither pays nor receives any compensation for that effect. If the impact on a bystander is bad, it is termed a negative externality. If the impact of a bystander is beneficial, it is called a positive externality. Pollution is an example of an negative externality while education is a prime example for a positive externality. A government can use a tax to account for these externalities. When they government does that, it’s called internalizing the externality. It gives buyers and sellers in the market an incentive to take account of the external effects of their actions. Not only the government internalize the externality but private parties can also do the same. The Coase theorem can be very effective with the private market dealing with externalities. The Coase theorem says that private economic factors can solve the problem of externalities among themselves. Whatever the distribution of rights, interested parties can always reach a bargain in which everyone is better off and the outcome is efficient. There are two ways a government can respond when an externality causes a market to reach an inefficient allocation of resources. Command-and-control policies regulate behavior directly. Market-based policies provide incentives so that private decision makers will choose to solve the problem on their own.
Overall, I would rate this chapter a difficulty rating of 1.5/3. This is a more conceptually-based chapter opposed to graphs/math which are my strong points. I have no questions on this chapter.
No comments:
Post a Comment