Chapter 10: Externalities

This chapter talks about externalities, which are the uncompensated impact of a person's actions on the well being of a bystander. Producers use the intersection between supply and demand to determine the optimal amount of a good from the standpoint of society as a whole. The use of a tax is called internalizing the externality. Internalizing an externality means that there is an altering of incentives so that people take account of the external effects of their actions. In essence, people are paying for the cost of the damage created in order for their product to be produced. Although some activities impose costs on third parties, others yield benefits and are called positive externalities. The optimal quantity is found is found where the social value curve and supply curve intersect.  This externality encourages the development of and dissemination of technological advancements, leading to higher productivity and wages for everyone. An important positive externality is called a technological spillover which is the impact of one firm's research and production efforts on other firms' access to technological advance. The chapter also talks about the Coase Theorem which is the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own. The chapter also talks about transaction costs which is the costs that parties incur in the process of agreeing and following through in a bargain. A corrective tax is a tax designed to induce private decision makers to take account of the social costs tht arise from a negative externality.