Externalities & Public Goods

• An externality is an action by an agent that affects someone other than that agent (a third party)
• Coasian Bargaining - the assignment of property rights creating a market for the externality
• Coasian Bargaining assumes perfect information and no transaction costs
• Pigouvian tax - per unit tax aimed at making producers internalise the externality
• Pigouvian tax = external marginal cost * efficient price
• A public good is a good that is non-rival and non-excludable
• Goods are non-excludable if people cannot be prevented from consuming them
• Goods are non-rival if a person’s consumption of a good does not reduce the amount that others can consume