Chapter 10

This chapter talked about a specific kind of market failure, externalities. They are a type of market failure because the market is not able to function at equilibrium and one of the purposes of government is finally put into action. There are two types of externalities, positive ones and negative ones, and both need to be dealt with. With a negative one, like pollution, a tax or production limit is imposed which helps to deal with the hurt third party and it creates an incentive to find a method of production that no longer hurts the third party. Another method of dealing with a negative externality is through a kind of limit. With pollution, for instance, companies may be given a number of permits which represent how much pollution they are allowed to permit. The benefit to this method or the method of taxes is that a whole new market is created. For some companies, it is extremely expensive to reduce pollution while for others it is cheap to reduce a glop. So the companies that cannot reduce much pollution value these permits more highly and are more willing to pay a higher price for the permits. That way, those companies that can easily reduce pollution sell their permits and it ends up being more cost efficient overall than imposing a tax or forcing all companies to reduce their pollution by a specific amount. With a positive one, like education, the government usually subsidizes in order to make it available for more people. There is still a deadweight loss with subsidies but that deadweight loss is supposed to be eliminated once the failed market has been fixed by the government with that same subsidy.