Externalities: Problems and Solutions

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externalities : Problems and Solutions131 Undergraduate Public EconomicsEmmanuel SaezUC Berkeley1OUTLINEChapter Externality Private-Sector Solutions to Negative Public-Sector Remedies for Distinctions Between Price and Quantity Approaches toAddressing Conclusion2EXTERNALITIES: Problems AND SOLUTIONSMarket failure: A problem that violates one of the assump-tions of the 1st welfare theorem and causes the market econ-omy to deliver an outcome that does not maximize efficiencyExternality: externalities arise whenever the actions of oneeconomic agent make another economic agent worse or betteroff, yet the first agent neither bears the costs nor receives thebenefits of doing so:Example: a steel plant that pollut

THE PROBLEMS WITH COASIAN SOLUTIONS 3) The Free Rider Problem: When an investment has a personal cost but a common bene t, individuals will underin-vest (example: a single country is better o walking out of Kyoto protocol for carbon emission controls) 4) Transaction Costs and Negotiating Problems: The

  Problem, Externalities