1
Chapter 5 - Externalities
Public Economics
2
Externality Defined
? An externality is present when the activity of
one entity (person or firm) directly affects the
welfare of another entity in a way that is outside
the market mechanism.
– Negative externality,These activities impose
damages on others.
– Positive externality,These activities benefits on
others.
3
Examples of Externalities
? Negative Externalities
– Pollution
– Cell phones in a movie theater
– Congestion on the internet
– Drinking and driving
– Student cheating that changes
the grade curve
– The,Club” anti-theft devise for
automobiles.
? Positive Externalities
– Research & development
– Vaccinations
– A neighbor’s nice landscape
– Students asking good questions
in class
– The,LoJack” anti-theft devise
for automobiles
? Not Considered Externalities
– Land prices rising in urban area.
– Known as,pecuniary”
externalities.
4
Nature of Externalities
? Arise because there is no market price attached
to the activity.
? Can be produced by people or firms.
? Can be positive or negative.
? Public goods are special case.
– Positive externality’s full effects are felt by everyone
in the economy.
5
Graphical Analysis,Negative
Externalities
? For simplicity,assume that a steel firm dumps
pollution into a river that harms a fishery
downstream.
? Competitive markets,firms maximize profits
– Note that steel firm only care’s about its own profits,
not the fishery’s
– Fishery only cares about its profits,not the steel
firm’s.
6
Graphical Analysis,continued
? MB = marginal benefit to steel firm
? MPC = marginal private cost to steel firm
? MD = marginal damage to fishery
? MSC = MPC+MD = marginal social cost
Figure 5.1
8
Graphical Analysis,continued
? From figure 5.1,as usual,the steel firm
maximizes profits at MB=MPC,This
quantity is denoted as Q1 in the figure.
? Social welfare is maximized at MB=MSC,
which is denoted as Q* in the figure.
9
Graphical Analysis,Implications
? Result 1,Q1>Q*
– Steel firm privately produces,too much” steel,because it
does not account for the damages to the fishery.
? Result 2,Fishery’s preferred amount is 0.
– Fishery’s damages are minimized at MD=0.
? Result 3,Q* is not the preferred quantity for either party,
but is the best compromise between fishery and steel firm.
? Result 4,Socially efficient level entails some pollution,
– Zero pollution is not socially desirable.
Figure 5.2
11
Graphical Analysis,Intuition
? In Figure 5.2,loss to steel firm of moving to Q* is
shaded triangle dcg.
– This is the area between the MB and MPC curve
going from Q1 to Q*.
? Fishery gains by an amount abfe.
– This is the area under the MD curve going from Q1 to
Q*,By construction,this equals area cdhg.
? Difference between fishery’s gain and steel firm’s
loss is the efficiency loss from producing Q1 instead
of Q*.
12
Numerical Example,Negative
Externalities
? Assume the steel firm faces the following MB and MPC curves:
MB Q? ?300
M P C Q? ?20
? Assume the fishery faces the following MD curve:
MD Q? ?40 2
13
Numerical Example,continued
? The steel firm therefore chooses Q1:
MB M P C Q Q Q? ? ? ? ? ? ?300 20 1401
? The socially efficient amount is instead Q*:
MB M S C M P C MD? ? ?
? ? ? ?? ? ? ? ? ? ? ?300 20 40 2 60Q Q Q Q *
14
Numerical Example,continued
? The deadweight loss of steel firm choosing Q1=140 is calculated as
the triangle between the MB and MSC curves from Q1 to Q*.
? ?? ?D W L Q Q M S C MBQ Q? ? ?12 1 1 1*
? ?? ?D W L ? ? ? ?12 140 60 480 160 $12800
? In Figure 5.2,this corresponds to area dhg.
15
Numerical Example,continued
? By moving to Q* the steel firm loses profits equal to the triangle
between the MB and MPC curve from Q1 to Q*.
? ?? ?L O S S Q Q MB MCQ Q? ? ?12 1 * * *
? ?? ?L O S S ? ? ? ?12 140 60 240 80 $6400
? By moving to Q* the fishery reduces its damages by an amount equal
to the trapezoid under the MD curve from Q1 to Q*.
? ?? ?G A IN Q Q MD MDQ Q? ? ?12 1 1* *
? ?? ?G A I N ? ? ? ?12 140 60 160 320 19200
16
Calculating gains & losses raises
practical questions
? What activities produce pollutants?
– With acid rain it is not known how much is associated with
factory production versus natural activities like plant decay.
? Which pollutants do harm?
– Pinpointing a pollutant’s effect is difficult,Some studies
show very limited damage from acid rain.
? What is the value of the damage done?
– Difficult to value because pollution not bought/sold in
market,Housing values may capitalize in pollution’s effect.
17
Private responses
? Coase theorem
? Mergers
? Social conventions
18
Coase Theorem
? Insight,root of the inefficiencies from
externalities is the absence of property rights.
? The Coase Theorem states that once property
rights are established and transaction costs are
small,then one of the parties will bribe the
other to attain the socially efficient quantity.
? The socially efficient quantity is attained
regardless of whom the property rights were
initially assigned.
19
Illustration of the Coase Theorem
? Recall the steel firm / fishery example,If the
steel firm was assigned property rights,it would
initially produce Q1,which maximizes its
profits.
? If the fishery was assigned property rights,it
would initially mandate zero production,
which minimizes its damages.
Figure 5.3
21
Coase Theorem – assign property
rights to steel firm
? Consider the effects of the steel firm reducing production
in the direction of the socially efficient level,Q*,This
entails a cost to the steel firm and a benefit to the fishery:
– The steel firm (and its customers) would lose surplus
between the MB and MPC curves between Q1 and Q1-1,
while the fishery’s damages are reduced by the area under
the MD curve between Q1 and Q1-1.
– Note that the marginal loss in profits is extremely small,
because the steel firm was profit maximizing,while the
reduction in damages to the fishery is substantial.
– A bribe from the fishery to the steel firm could therefore
make all parties better off.
22
Coase Theorem – assign property
rights to steel firm
? When would the process of bribes (and pollution
reduction) stop?
– When the parties no longer find it beneficial to bribe.
– The fishery will not offer a bribe larger than it’s MD for a
given quantity,and the steel firm will not accept a bribe
smaller than its loss in profits (MB-MPC) for a given
quantity.
– Thus,the quantity where MD=(MB-MPC) will be where the
parties stop bribing and reducing output.
– Rearranging,MC+MPC=MB,or MSC=MB,which is equal
at Q*,the socially efficient level.
23
Coase Theorem – assign property
rights to fishery
? Similar reasoning follows when the fishery has property
rights,and initially allows zero production.
– The fishery’s damages are increased by the area under
the MD curve by moving from 0 to 1,On the other hand,
the steel firm’s surplus is increased.
– The increase in damages to the fishery is initially very
small,while the gain in surplus to the steel firm is large.
– A bribe from the steel firm to the fishery could therefore
make all parties better off.
24
Coase Theorem – assign property
rights to fishery
? When would the process of bribes now stop?
– Again,when the parties no longer find it beneficial to
bribe.
– The fishery will not accept a bribe smaller than it’s
MD for a given quantity,and the steel firm will not
offer a bribe larger than its gain in profits (MB-MPC)
for a given quantity.
– Again,the quantity where MD=(MB-MPC) will be
where the parties stop bribing and reducing output,
This still occurs at Q*.
25
When is the Coase Theorem
relevant or not?
? Low transaction
costs
– Few parties involved
? Source of externality
well defined
? Example,Several
firms with pollution
? Not relevant with
high transaction
costs or ill-defined
externality
? Example,Air
pollution
26
Private responses,continued
? Mergers
? Social conventions
27
Mergers
? Mergers between firms,internalize” the
externality.
? A firm that consisted of both the steel firm &
fishery would only care about maximizing the
joint profits of the two firms,not either’s profits
individually.
? Thus,it would take into account the effects of
increased steel production on the fishery.
28
Social Conventions
? Certain social conventions can be viewed as
attempts to force people to account for the
externalities they generate.
? Examples include conventions about not
littering,not talking in a movie theatre,etc.
29
Public responses
? Taxes
? Subsidies
? Creating a market
? Regulation
30
Taxes
? Again,return to the steel firm / fishery example.
? Steel firm produces inefficiently because the
prices for inputs incorrectly signal social costs,
Input prices are too low,Natural solution is to
levy a tax on a polluter.
? A Pigouvian tax is a tax levied on each unit of
a polluter’s output in an amount just equal to
the marginal damage it inflicts at the efficient
level of output.
Figure 5.4
32
Taxes
? This tax clearly raises the cost to the steel firm
and will result in a reduction of output.
? Will it achieve a reduction to Q*?
– With the tax,t,the steel firm chooses quantity such that
MB=MPC+t.
– When the tax is set to equal the MD evaluated at Q*,the
expression becomes MB=MPC+MD(Q*).
– Graphically it is clear that MB(Q*)-MPC(Q*)=MD(Q*),
thus the firm produces the efficient level.
33
Numerical Example,Pigouvian
taxes
? Returning to the numerical example:
MB Q? ?300
M P C Q? ?20
? Recall that Q1=140 and Q*=60.
MD Q? ?40 2
34
Numerical Example,Pigouvian
taxes
? Setting t=MD(60) gives t=160,The firm now sets
MB=MPC+t,which then yields Q*,MB M P C t
Q Q t
Q Q
Q
Q
? ?
? ? ? ? ?
? ? ? ? ?
? ?
? ?
300 20
300 20 160
120 2
60
35
Public responses
? Subsidies
? Creating a market
? Regulation
36
Subsidies
? Another solutions is paying the polluter to not pollute.
? Assume this subsidy was again equal to the marginal
damage at the socially efficient level.
? Steel firm would cut back production until the loss in
profit was equal to the subsidy; this again occurs at Q*.
? Subsidy could induce new firms to enter the market,
however.
37
Public responses
? Creating a market
? Regulation
38
Creating a market
? Sell producers permits to pollute,Creates
market that would not have emerged.
? Process:
– Government sells permits to pollute in the quantity Z*.
– Firms bid for the right to own these permits,fee
charged clears the market.
? In effect,supply of permits is inelastic.
Figure 5.6
40
Creating a market,continued
? Process would also work if the government
initially assigned permits to firms,and then
allowed firms to sell permits.
– Distributional consequences are different – firms that
are assigned permits initially now benefit.
? One advantage over Pigouvian taxes,permit
scheme reduces uncertainty over ultimate
level of pollution when costs of MB,MPC,and
MD are unknown.
41
Public responses
? Regulation
42
Regulation
? Each polluter must reduce pollution by a certain
amount or face legal sanctions.
? Inefficient when there are multiple firms with
different costs to pollution reduction,Efficiency
does not require equal reductions in pollution
emissions; rather it depends on the shapes of
the MB and MPC curves.
Figure 5.7
44
The U.S,response
? 1970’s,Regulation
– Congress set national air quality standards that were
to be met independent of the costs of doing so.
? 1990’s,Market oriented approaches have
somewhat more influence,but not dominant
– 1990 Clean Air Act created a market to control
emissions of sulfur dioxide with permits.
45
Graphical Analysis,Positive
Externalities
? For simplicity,assume that a university
conducts research that has spillovers to a
private firm.
? Competitive markets,firms maximize profits
– Note that university only care’s about its own profits,
not the private firm’s.
– Private firm only cares about its profits,not the
university’s.
46
Graphical Analysis,continued
? MPB = marginal private benefit to university
? MC = marginal cost to university
? MEB = marginal external benefit to private firm
? MSB = MPB+MEB = marginal social benefit
Figure 5.8
48
Graphical Analysis,continued
? From figure 5.8,as usual,the university
maximizes profits at MPB=MC,This
quantity is denoted as R1 in the figure.
? Social welfare is maximized at MSB=MC,
which is denoted as R* in the figure.
49
Graphical Analysis,Implications
? Result 1,R1<R*
– University privately produces,too little” research,
because it does not account for the benefits to the
private firm.
? Result 2,Private firm’s preferred amount is where the MEB
curve intersects the x-axis.
– Firm’s benefits are maximized at MEB=0.
? Result 3,R* is not the preferred quantity for either party,but is
the best compromise between university and private firm.
50
Graphical Analysis,Intuition
? In Figure 5.8,loss to university of moving to R* is
the triangle area between the MC and MPB
curve going from R1 to R*.
? Private firm gains by the area under the MEB
curve going from R1 to R*,
? Difference between private firm’s gain and
university’s loss is the efficiency loss from
producing R1 instead of R*.
51
Recap of externalities
? Externalities definition
? Negative externalities – graphical & numerical
examples
? Private responses
? Public responses
? Positive externalities
Chapter 5 - Externalities
Public Economics
2
Externality Defined
? An externality is present when the activity of
one entity (person or firm) directly affects the
welfare of another entity in a way that is outside
the market mechanism.
– Negative externality,These activities impose
damages on others.
– Positive externality,These activities benefits on
others.
3
Examples of Externalities
? Negative Externalities
– Pollution
– Cell phones in a movie theater
– Congestion on the internet
– Drinking and driving
– Student cheating that changes
the grade curve
– The,Club” anti-theft devise for
automobiles.
? Positive Externalities
– Research & development
– Vaccinations
– A neighbor’s nice landscape
– Students asking good questions
in class
– The,LoJack” anti-theft devise
for automobiles
? Not Considered Externalities
– Land prices rising in urban area.
– Known as,pecuniary”
externalities.
4
Nature of Externalities
? Arise because there is no market price attached
to the activity.
? Can be produced by people or firms.
? Can be positive or negative.
? Public goods are special case.
– Positive externality’s full effects are felt by everyone
in the economy.
5
Graphical Analysis,Negative
Externalities
? For simplicity,assume that a steel firm dumps
pollution into a river that harms a fishery
downstream.
? Competitive markets,firms maximize profits
– Note that steel firm only care’s about its own profits,
not the fishery’s
– Fishery only cares about its profits,not the steel
firm’s.
6
Graphical Analysis,continued
? MB = marginal benefit to steel firm
? MPC = marginal private cost to steel firm
? MD = marginal damage to fishery
? MSC = MPC+MD = marginal social cost
Figure 5.1
8
Graphical Analysis,continued
? From figure 5.1,as usual,the steel firm
maximizes profits at MB=MPC,This
quantity is denoted as Q1 in the figure.
? Social welfare is maximized at MB=MSC,
which is denoted as Q* in the figure.
9
Graphical Analysis,Implications
? Result 1,Q1>Q*
– Steel firm privately produces,too much” steel,because it
does not account for the damages to the fishery.
? Result 2,Fishery’s preferred amount is 0.
– Fishery’s damages are minimized at MD=0.
? Result 3,Q* is not the preferred quantity for either party,
but is the best compromise between fishery and steel firm.
? Result 4,Socially efficient level entails some pollution,
– Zero pollution is not socially desirable.
Figure 5.2
11
Graphical Analysis,Intuition
? In Figure 5.2,loss to steel firm of moving to Q* is
shaded triangle dcg.
– This is the area between the MB and MPC curve
going from Q1 to Q*.
? Fishery gains by an amount abfe.
– This is the area under the MD curve going from Q1 to
Q*,By construction,this equals area cdhg.
? Difference between fishery’s gain and steel firm’s
loss is the efficiency loss from producing Q1 instead
of Q*.
12
Numerical Example,Negative
Externalities
? Assume the steel firm faces the following MB and MPC curves:
MB Q? ?300
M P C Q? ?20
? Assume the fishery faces the following MD curve:
MD Q? ?40 2
13
Numerical Example,continued
? The steel firm therefore chooses Q1:
MB M P C Q Q Q? ? ? ? ? ? ?300 20 1401
? The socially efficient amount is instead Q*:
MB M S C M P C MD? ? ?
? ? ? ?? ? ? ? ? ? ? ?300 20 40 2 60Q Q Q Q *
14
Numerical Example,continued
? The deadweight loss of steel firm choosing Q1=140 is calculated as
the triangle between the MB and MSC curves from Q1 to Q*.
? ?? ?D W L Q Q M S C MBQ Q? ? ?12 1 1 1*
? ?? ?D W L ? ? ? ?12 140 60 480 160 $12800
? In Figure 5.2,this corresponds to area dhg.
15
Numerical Example,continued
? By moving to Q* the steel firm loses profits equal to the triangle
between the MB and MPC curve from Q1 to Q*.
? ?? ?L O S S Q Q MB MCQ Q? ? ?12 1 * * *
? ?? ?L O S S ? ? ? ?12 140 60 240 80 $6400
? By moving to Q* the fishery reduces its damages by an amount equal
to the trapezoid under the MD curve from Q1 to Q*.
? ?? ?G A IN Q Q MD MDQ Q? ? ?12 1 1* *
? ?? ?G A I N ? ? ? ?12 140 60 160 320 19200
16
Calculating gains & losses raises
practical questions
? What activities produce pollutants?
– With acid rain it is not known how much is associated with
factory production versus natural activities like plant decay.
? Which pollutants do harm?
– Pinpointing a pollutant’s effect is difficult,Some studies
show very limited damage from acid rain.
? What is the value of the damage done?
– Difficult to value because pollution not bought/sold in
market,Housing values may capitalize in pollution’s effect.
17
Private responses
? Coase theorem
? Mergers
? Social conventions
18
Coase Theorem
? Insight,root of the inefficiencies from
externalities is the absence of property rights.
? The Coase Theorem states that once property
rights are established and transaction costs are
small,then one of the parties will bribe the
other to attain the socially efficient quantity.
? The socially efficient quantity is attained
regardless of whom the property rights were
initially assigned.
19
Illustration of the Coase Theorem
? Recall the steel firm / fishery example,If the
steel firm was assigned property rights,it would
initially produce Q1,which maximizes its
profits.
? If the fishery was assigned property rights,it
would initially mandate zero production,
which minimizes its damages.
Figure 5.3
21
Coase Theorem – assign property
rights to steel firm
? Consider the effects of the steel firm reducing production
in the direction of the socially efficient level,Q*,This
entails a cost to the steel firm and a benefit to the fishery:
– The steel firm (and its customers) would lose surplus
between the MB and MPC curves between Q1 and Q1-1,
while the fishery’s damages are reduced by the area under
the MD curve between Q1 and Q1-1.
– Note that the marginal loss in profits is extremely small,
because the steel firm was profit maximizing,while the
reduction in damages to the fishery is substantial.
– A bribe from the fishery to the steel firm could therefore
make all parties better off.
22
Coase Theorem – assign property
rights to steel firm
? When would the process of bribes (and pollution
reduction) stop?
– When the parties no longer find it beneficial to bribe.
– The fishery will not offer a bribe larger than it’s MD for a
given quantity,and the steel firm will not accept a bribe
smaller than its loss in profits (MB-MPC) for a given
quantity.
– Thus,the quantity where MD=(MB-MPC) will be where the
parties stop bribing and reducing output.
– Rearranging,MC+MPC=MB,or MSC=MB,which is equal
at Q*,the socially efficient level.
23
Coase Theorem – assign property
rights to fishery
? Similar reasoning follows when the fishery has property
rights,and initially allows zero production.
– The fishery’s damages are increased by the area under
the MD curve by moving from 0 to 1,On the other hand,
the steel firm’s surplus is increased.
– The increase in damages to the fishery is initially very
small,while the gain in surplus to the steel firm is large.
– A bribe from the steel firm to the fishery could therefore
make all parties better off.
24
Coase Theorem – assign property
rights to fishery
? When would the process of bribes now stop?
– Again,when the parties no longer find it beneficial to
bribe.
– The fishery will not accept a bribe smaller than it’s
MD for a given quantity,and the steel firm will not
offer a bribe larger than its gain in profits (MB-MPC)
for a given quantity.
– Again,the quantity where MD=(MB-MPC) will be
where the parties stop bribing and reducing output,
This still occurs at Q*.
25
When is the Coase Theorem
relevant or not?
? Low transaction
costs
– Few parties involved
? Source of externality
well defined
? Example,Several
firms with pollution
? Not relevant with
high transaction
costs or ill-defined
externality
? Example,Air
pollution
26
Private responses,continued
? Mergers
? Social conventions
27
Mergers
? Mergers between firms,internalize” the
externality.
? A firm that consisted of both the steel firm &
fishery would only care about maximizing the
joint profits of the two firms,not either’s profits
individually.
? Thus,it would take into account the effects of
increased steel production on the fishery.
28
Social Conventions
? Certain social conventions can be viewed as
attempts to force people to account for the
externalities they generate.
? Examples include conventions about not
littering,not talking in a movie theatre,etc.
29
Public responses
? Taxes
? Subsidies
? Creating a market
? Regulation
30
Taxes
? Again,return to the steel firm / fishery example.
? Steel firm produces inefficiently because the
prices for inputs incorrectly signal social costs,
Input prices are too low,Natural solution is to
levy a tax on a polluter.
? A Pigouvian tax is a tax levied on each unit of
a polluter’s output in an amount just equal to
the marginal damage it inflicts at the efficient
level of output.
Figure 5.4
32
Taxes
? This tax clearly raises the cost to the steel firm
and will result in a reduction of output.
? Will it achieve a reduction to Q*?
– With the tax,t,the steel firm chooses quantity such that
MB=MPC+t.
– When the tax is set to equal the MD evaluated at Q*,the
expression becomes MB=MPC+MD(Q*).
– Graphically it is clear that MB(Q*)-MPC(Q*)=MD(Q*),
thus the firm produces the efficient level.
33
Numerical Example,Pigouvian
taxes
? Returning to the numerical example:
MB Q? ?300
M P C Q? ?20
? Recall that Q1=140 and Q*=60.
MD Q? ?40 2
34
Numerical Example,Pigouvian
taxes
? Setting t=MD(60) gives t=160,The firm now sets
MB=MPC+t,which then yields Q*,MB M P C t
Q Q t
Q Q
Q
Q
? ?
? ? ? ? ?
? ? ? ? ?
? ?
? ?
300 20
300 20 160
120 2
60
35
Public responses
? Subsidies
? Creating a market
? Regulation
36
Subsidies
? Another solutions is paying the polluter to not pollute.
? Assume this subsidy was again equal to the marginal
damage at the socially efficient level.
? Steel firm would cut back production until the loss in
profit was equal to the subsidy; this again occurs at Q*.
? Subsidy could induce new firms to enter the market,
however.
37
Public responses
? Creating a market
? Regulation
38
Creating a market
? Sell producers permits to pollute,Creates
market that would not have emerged.
? Process:
– Government sells permits to pollute in the quantity Z*.
– Firms bid for the right to own these permits,fee
charged clears the market.
? In effect,supply of permits is inelastic.
Figure 5.6
40
Creating a market,continued
? Process would also work if the government
initially assigned permits to firms,and then
allowed firms to sell permits.
– Distributional consequences are different – firms that
are assigned permits initially now benefit.
? One advantage over Pigouvian taxes,permit
scheme reduces uncertainty over ultimate
level of pollution when costs of MB,MPC,and
MD are unknown.
41
Public responses
? Regulation
42
Regulation
? Each polluter must reduce pollution by a certain
amount or face legal sanctions.
? Inefficient when there are multiple firms with
different costs to pollution reduction,Efficiency
does not require equal reductions in pollution
emissions; rather it depends on the shapes of
the MB and MPC curves.
Figure 5.7
44
The U.S,response
? 1970’s,Regulation
– Congress set national air quality standards that were
to be met independent of the costs of doing so.
? 1990’s,Market oriented approaches have
somewhat more influence,but not dominant
– 1990 Clean Air Act created a market to control
emissions of sulfur dioxide with permits.
45
Graphical Analysis,Positive
Externalities
? For simplicity,assume that a university
conducts research that has spillovers to a
private firm.
? Competitive markets,firms maximize profits
– Note that university only care’s about its own profits,
not the private firm’s.
– Private firm only cares about its profits,not the
university’s.
46
Graphical Analysis,continued
? MPB = marginal private benefit to university
? MC = marginal cost to university
? MEB = marginal external benefit to private firm
? MSB = MPB+MEB = marginal social benefit
Figure 5.8
48
Graphical Analysis,continued
? From figure 5.8,as usual,the university
maximizes profits at MPB=MC,This
quantity is denoted as R1 in the figure.
? Social welfare is maximized at MSB=MC,
which is denoted as R* in the figure.
49
Graphical Analysis,Implications
? Result 1,R1<R*
– University privately produces,too little” research,
because it does not account for the benefits to the
private firm.
? Result 2,Private firm’s preferred amount is where the MEB
curve intersects the x-axis.
– Firm’s benefits are maximized at MEB=0.
? Result 3,R* is not the preferred quantity for either party,but is
the best compromise between university and private firm.
50
Graphical Analysis,Intuition
? In Figure 5.8,loss to university of moving to R* is
the triangle area between the MC and MPB
curve going from R1 to R*.
? Private firm gains by the area under the MEB
curve going from R1 to R*,
? Difference between private firm’s gain and
university’s loss is the efficiency loss from
producing R1 instead of R*.
51
Recap of externalities
? Externalities definition
? Negative externalities – graphical & numerical
examples
? Private responses
? Public responses
? Positive externalities
