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 pollutes a river used for recreationExternalities are one example of market failure3EXTERNALITY THEORY: ECONOMICS OFNEGATIVE PRODUCTION EXTERNALITIESNegative production externality: When a firm s productionreduces the well-bei

Market 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 e ciency Externality: Externalities arise whenever the actions of one economic agent …

  Market, Failure, Externalities, Market failure