Chapter 10 review.

 I thought this chapter was relatively easy to understand and give it a difficulty rating of 2/3.  I did not have any problems with any part of the chapter, only had to look at the concept of corrective taxes a little deeper and the graphs There were lots of new terms that I needed time to process the information. 


This chapter first begins by reinforcing the concept of externalities. Externalities are when the social value or cost of a good is not equal to the equilibrium quantity and price. This was already introduced in the beginning of the book, and thus, not very hard to understand. Externalities happen when a transaction between private parties affects a bystander. An interesting example is when pollution creates a negative externality. 

The part where I had to look deeper into was when the socially optimum output is less than the equilibrium output. To reconcile this, the government can impose a tax for pollution to move the quantity produced to the socially optimal quantity. This is a form of corrective tax, or Pigovian tax.

Interestingly, another way the government may try to internalize the externality is to impose pollution regulations and give out pollution permits. This forces companies to reduce the amount of pollution they produce. If pollution permits are allowed to be sold however, a market will develop for them. Companies that can reduce pollution at a lower cost will sell them to companies that reduce pollution at a higher cost. There are also positive externalities. 

Another way externalities can be solved is through a concept called the Coase theorem. This is where the people are able to solve the problem themselves. In the book, there was an interesting example in where someone may pay another person so that their dog may stop barking if the cost to the dog owner is less than the price paid. Basically, the two parties can bargain with each other to solve thee extrenality problem. In a bigger view, if you there can't be a compromise, then the government has to step in.