Lesson 7 - Externalities and Environmental Economics

An Overview of Lesson 7

In this lesson, we reach the end of the topic of market failures. The last market failure mechanism for us to address, which is perhaps the most important to the topics of energy and sustainability, is the market failure known as an "externality," which is a violation of the assumption of free entry and exit into a market. The most important type of externality is the existence of air and water pollution. In this lesson, we will take a look at how we can use economics methods to "internalize" externalities. We will also speak of goods that are under-provided or over-exploited in an uncontrolled marketplace due to the absence of well-defined property rights.

What will we learn?

By the end of this lesson, you should be able to:

• define what an externality is;
• list and describe some examples of externalities;
• explain the difference between private and social costs;
• draw a diagram showing the private and socially optimal equilibria, and the private and social cost functions;
• show how we can define and get to the socially optimal equilibrium given a schedule of utilities/costs for each party;
• explain the fundamentals of the Coase Theorem;
• describe situations where the Coase Theorem does not work well;
• describe different approaches to pollution control;
• describe and explain the merits of different approaches to pollution abatement.

What is due for Lesson 7?

This lesson will take us one week to complete. Please refer to the Calendar in Canvas for specific time frames and due dates. There are a number of required activities in this lesson. The chart below provides an overview of those activities that must be submitted for this lesson. For assignment details, refer to the lesson page noted.