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Externalities (Define (Postive (impact on the third party is beneficial. e…
Externalities
Define
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Postive
impact on the third party is beneficial. e.g immunisation, education
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Negative
impact on a third party is not beneficial e.g smoking, pollution
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Private Contracting
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Coase Theorem
private firms can solve the problem of externalities if they can bargain without cost over the allocation of resources
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In the diagram, Q market is the quantity that the market will produce Qe units of aluminium. But if a negative externality is taken into account it produces Q optimum. Q optimum is less than Q market therefore there is overproduction.
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