Chapter 10

Chapter ten focuses on externalities and how they can positively or negatively affect the market. Externalities are the impact that activities between two people or businesses have during a transaction on a third party person. Positive externalities cause a shift in the demand curve to the right, increasing the amount demanded. While negative externalities shift the supply curve to the left, displaying a reduction in the quantity supplied. In some cases the government can intervene to improve negative externalities by taxing. This use of tax is known as internalizing the externality as it alters incentives so people take account of their external affects of their actions. They can also subsidize positive externalities. Subsidies shift the supply curve down based on the size of the subsidy, which increases the equilibrium for the market. This intervention in a market is called industrial policy.Command and control policies can help a market by regulating or forbidding behaviors. In market based policy, the government can align private incentives with social efficiency. Taxes that help control negative externalities are called corrective taxes that aim to change a persons decisions. The tax is a negative incentive to stop the negative externality. However, the governemnt does not always have to intervene, as problems with externalities can be solved with moral codes and social sanctions because if buyers do not buy a good due to an externality the company create, the company will not survive. The coase theorem is the concept that if a private party can trade without a cost for allocating resources, they can remedy the externality by themselves.  Transaction costs  are the prices that parties receive in agreeing to and following through on a bargain.