Journaling of Chapter 10: Externalities

     Chapter 10 addresses externalities, the uncompensated impact of one person’s actions on the wellbeing of a bystander. There are two types of externalities, negative and positive. Negative externality is when the optimal quantity that maximizes total surplus is less than the equilibrium quantity generated by the market. Positive externality is when the optimal quantity that maximizes the total surplus is greater than the equilibrium quantity generated by the market. To correct market inefficiency the government may choose to internalize an externality which is when they alter incentives in order to make people take into account external effects of their actions. Public policies toward externalities involving government include command-and-control policies which are regulations that limit a certain behavior. Another public policy is market-based policies where the government can place corrective taxes, subsidies, and tradable pollution permits. There are also private solutions to externalities. Private solutions include moral codes, charities, and private markets. This leads the readers into The Coase theorem; people can bargain amongst themselves and reach an efficient solution.

     I would give this chapter a difficulty rating of 1 out of 3. I think this was a very simple chapter because we are already familiar with market failure. Also, this is just an introductory chapter so the following chapters will probably continue going more in depth. The constant references to pollution made the chapter easier to comprehend because it gave us a real-life problem and solution that applies all the economic policies. Overall, I really enjoyed this chapter on externalities and learning about how they can be solved by either government policies or with private solutions.