Answer to Question #260647 in Microeconomics for lexanator

Question

1.    Give an example of a negative externality and a positive externality. Explain why market outcomes are inefficient in the presence of externalities.

 

2.    Give an example of a private solution to an externality. What is the Coase theorem? Why are private economic actors sometimes unable to solve the problems caused by an externality?

 

3.    List some of the ways that the problems caused by externalities can be solved without government intervention. 

 

4.    Imagine that you are a nonsmoker sharing a room with a smoker. According to the Coase theorem, what determines whether your roommate smokes in the room? Is this outcome efficient? How do you and your roommate reach this solution? 

5.    Even if the externality issue is resolved using a private solution (Coase), can you think of other issues or problems that would stem from the situation? (For example, how do you determine to whom to give rights?) 

Answer 1

(1)

Example of a negative externality is air and noise pollution. This exists when the consumption or production of a product leads to a cost to a third party.

Example of a positive externality is technology spillover. A positive externality occurs when a benefit spills over.

Market outcomes are inefficient in the presence of externalities because externalities result in market failure. This is because the equilibrium price of a service or a product does not accurately reflect the true costs and benefits of that product or service.

(2)

The imposition of gasoline tax is an example of a private solution to a negative externality resulting from air pollution.

Coase theorem states that private parties can find efficient solutions to externalities without government intervention.

Private economic actors are unable to resolve an externality issue because of exchange costs incurred that are related to making a consent to and doing an exchange. The costs incurred may be unreasonably high.

(3)

• Moral codes and social sanctions (such as littering).
• Implementation of charity programs by firms.
• Business agreements in the personal circumstance of essential gatherings.

(4)

According to the coase theorem, private monetary entertainers can tackle the issue of externalities amongst themselves. No matter the underlying dissemination of freedoms, the concerned individuals can reach at a deal where everybody is sound and the result is proficient.

We first consider what result is socially proficient. The smoker gets advantage from smoking, yet the smoke is a negative externality to the nonsmoker. If the advantage surpasses the expense, then it is proficient for the smoker to smoke in the room. But if the expense surpasses the advantage, the smoker is not supposed to smoke in the room.

(5)

You can determine to whom to give rights through use of a command or making a ruling or rather using other control aspects.