ECON 356

In Class Exercise Fifteen - Externalities

1.  Explain how externalities (positive and negative) are associated with "free riding."

2.  In mainstream theory -- too much is consumed or produced when negative externalities exist.

Explain this idea - using both words and graphs (you should have two graphs).

3.  Explain the concept of an inframarginal externality.  Why do economists not worry about them?

4.  Pecuniary externalities are also considered a non-issue with most mainstream economists.  Why?

5.  When a good is rival but non-excludable -- the tragedy of the commons is likely to occur.  Why?  Example?

6.  If your neighbor is playing music too loud (that bothers you) -- how would the Coase theorem solve the problem?  Explain.

7.  Now what might keep this from happening?