Reading notes--Principles of Economics (chapter10)

Summary

Chapter 10 is Externalities. This chapter introduces the situation when the producers and consumers are not the only interested parties.

• Externalities include external cost and external benefit.
• Externalities make the equilibrium not the optimum.
• The use of tax or subsidy can make the equilibrium equal to the optimum if the new supply curve(private cost) coincides with the social-cost curve.

• Corrective tax and pollution permits are used for decreasing negative externality.
• Pollution permits mean the firms can buy the rights to pollute more from other firms.
• Pollution permits could be better because different kinds of firms have the different cost to avoid polluting.
• Regulation can be another way to limit the negative externality. If the negative externality is much greater than the private benefits, the regulation would be better.

Coase theorem is the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own.

• Private parties may not solve the problem of negative externality if the process of bargain has the cost.

Definitions

1. Externality– the uncompensated impact of one person’s actions on the well-being of a bystander

2. Internalizing the externality– altering incentives so that people take into account the external effects of their actions

3. Corrective taxes– a tax designed to induce private decision makers to take into account the social costs that arise from a negative externality

4. Coase theorem– the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

5. Transaction costs– the costs that parties incur during the process of agreeing to and following through on a bargain

Review

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