Chapter 10

     In Chapter 10, it talks about externalities. An externality is the effect on a 3rd party when a trade or activity occurs. Negative externalities have an adverse impact on the bystander, such as pollution. Positives externalities have a beneficial effect on the bystander, such as technology spillovers. Negative externalities lead markets to produce a larger quantity than is socially desirable, while positive externalities leads to a smaller quantity than desirable.
     The government can interfere with the trade such that a more desirable outcome occurs. This is called internalizing the externality, altering incentives to make people take into account external effects. In the case of negative externalities, tax would reduce the quantity produced. This type of tax is called a corrective tax. In the case of positive externalities, subsidies would increase the quantity produced.
     Externalities can also be solve privately. An example of this is charities who try protect the entirement. Donations to schools are also ways that people try to help what they value. Two groups can also make agreements and make a contract to give each other the most benefits as possible, such as bee keepers and apple growers.
     Economist Ronald Coase came up with a theory known as the Coase theorem. It states that if private parties can bargain without cost over allocation of resources, they can solve the problem of externalities on their own. The example the book uses is a barking dog. Either the owner of the dog can pay the victims to keep the dog, or the victims can pay the owner to give up the dog. Transaction costs, or costs that parties incur when trying to make a deal, prevents this from always happening.
This chapter is a 1 in difficulty.