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Chapter 10
Externalities
10 EXTERNALITIES
WHAT’ S NEW IN THE S EVENTH EDITION:
There is a new In the News feature on What Should We Do about Climate Change― . ‖
LEARNING OBJECTIVES:
By the end of this chapter, students should understand:
what an externality is.
why externalities can make market outcomes inefficient.
the various government policies aimed at solving the problem of externalities.
how people can sometimes solve the problem of externalities on their own.
why private solutions to externalities sometimes do not work.
CONTEXT AND PURPOSE:
Chapter 10 is the first chapter in the microeconomic section of the text. It is the first chapter in a three-
chapter sequence on the economics of the public sector. Chapter 10 addresses externalities —the
uncompensated impact of one person ’ s actions on the well-being of a bystander. Chapter 11 will address
public goods and common resources (goods that will be defined in Chapter 11) and Chapter 12 will
address the tax system.
In Chapter 10, different sources of externalities and a variety of potential cures for externalities are
addressed. Markets maximize total surplus to buyers and sellers in a market. However, if a market
generates an externality (a cost or benefit to someone external to the market) the market equilibrium
may not maximize the total benefit to society. Thus, in Chapter 10 we will see that while markets are
usually a good way to organize economic activity, governments can sometimes improve market outcomes.
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? 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 10/Externalities ? 18
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