 Externality |
| -
Definition |
| -
Divergence between private and social values |
| -
Positive/ negative externality : In most cases, only one type of externality will be found
in a question |
| Pigou’ s Two Roads |
| Externality
is considered as one type of market failure ( i.e. the market fails to function properly
and so economic efficiency can't be achieved ) � inefficiency ( social optimal : MSC =
MSB ) |
| Traditional
view : government intervention is necessary, problems of government intervention involved
: |
| -
information cost : find the optimal output level, find the tax level |
| -
administration cost |
| -
deadweight loss due to the tax |
| To : well
- defined PPR and insignificant TC � efficient resource allocation can be achieved
through private contracting / market ( Coase Theorem ) : case study of farmer and cattle
raiser |
| Remarks on Coase Theorem |
| -If TC is
prohibitive, efficiency is still attained even externality exists as benefit < cost |
| -TC = 0
there will be no externality as zero TC implies PPR is well defined, all are solved by the
market |
