In this lesson, we examined the last of our market failures: the externality. We described several different cases where economic costs can be transferred onto people who are not willing participants in an economic transaction.
We then looked at methods of internalizing externalities, or how to move from some private equilibrium to a "socially optimal" equilibrium. As we saw, externalities typically exist because of poorly-defined or non-existent property rights. By instituting a system of property rights, and allowing self-interested exchange between elements of society, we are often able to move to the socially optimal equilibrium at the lowest possible cost to society.
We examined various methods of pollution-abatement schemes, including command-and-control and Coasian Cap-and-Trade schemes. We demonstrated why cap-and-trade systems can be more effective than command and control, and easier to operate and more accurate and effective than Pigouvian tax schemes.
We continued in the theme of poor property rights, looking at public goods and common pools, and we described ways of addressing the problems associated with the undesirable results of these property-rights failures.
Have you completed everything?
You have reached the end of Lesson 7! Double check the list of requirements on the first page of this lesson to make sure you have completed all of the activities listed there.
Tell us about it!If you have anything you'd like to comment on or add to the lesson materials, feel free to post your thoughts in the discussion forum in Canvas. For example, if there was a point that you had trouble understanding, ask about it.