MGT 621 – Microeconomics

7. Externalities and Regulation

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       Lecture Notes (Overheads Used In Class)

· Lecture 7 – Slides

Reading (Preparation)

· Pindyck/Rubinfeld, Ch. 18

Questions (Preparation)

· What is a (positive/negative) externality? Provide examples.

· Who should pay for the negative effects of an externality, the one who causes it or the one who experiences a detrimental payoff impact? Provide examples.

· How can taxes be used to “internalize” the effects of negative externalities?

· What role do property rights play when resolving conflicts resulting from externalities?

· Explain the role of uncertainty in a social planner’s choice between emissions permits and emissions taxes.

Background Reading (for future reference only)

· Coase, R.H. (1960) “The Problem of Social Cost,” Journal of Law and Economics, Vol. 3, pp. 1—44.

· Weitzman, M.L. (1974) “Prices vs. Quantities,“ Review of Economic Studies, Vol. 41, No. 4, pp. 477—491.

· Weber, T.A., Neuhoff, K. (2010) “Carbon Markets and Technological Innovation,“ Journal of Environmental Economics and Management, Vol. 60, No. 2, pp. 115—132.