Exam 2 Part 2- Part Deux, If You Will

Note, Children, that studying is more effective if you can relate the material you are learning to things you already know. Time is a flat circle, you see. It is even more effective if you can explain what you are learning for other people who are not in your course. In diffusing education you are also generating a positive externality and externalities just happen to be part of my Microeconomics exams! Yayy!!

So let me explain some things to you- it's time to get your learn on.

An externality is the uncompensated impact of one person's actions on the well-being of a bystander. In this case, you, blog-reader, are outside of the exchange that is occurring between myself and Austin Community College, but are being effected by this exchange, because I am imparting some of my knowledge base on to you for no cost! (How lucky of you! But only *I* will get the degree...maybe...)

Externalities are not all free information and kitten hugs- there are negative externalities that society contends with every day, like pollution!

Let's tie this into some Macroeconomics- productivity and GDP are good indicators of economic well-being because when a country is more efficiently generating a variety goods and services (productivity) it will typically have a higher GDP (Gross Domestic Product: the market value of all final goods and services produced within a country in a given period of time and also reflects a nations income because income= expenditure) and with more income a country can afford more infrastructure. (You know, because taxes are on income in the U.S., among other things.) However, while a higher economic well-being is good it can not reflect the over-all or individual well being of citizens with total accuracy in part because of externalities like pollution. China has the second highest nominal GDP in the world but the pollution and poor working environments that go into production are not reflected in that number. So, while China has been doing very well economically the well-being of it's people is probably not doing as well.

In this instance it would be a good idea to push to internalize the externality, or create incentives so that people take into account the external effects of their actions. Governments can do this through regulation, by imposing corrective taxes, or by offering tradable pollution permits. In imposing corrective taxes or offering tradable pollution permits the government is relying on the market to control the externality- if it becomes too expensive to pollute companies will look for alternate means of production or shut down production entirely.

Examining how Governments can handle externalities leads us to the Coase theorem which is about private solutions. The Coase theorem is the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own. The idea is that if people don't have transaction costs (the costs that parties incur in the process of agreeing and following through on a bargain) individuals will create an outcome in which the benefits will outweigh the costs to both parties.

And that's a bit on externalities...

Final thought- Carly Rae Jepsen's last single got way less attention than it should have. It's arguably more fun and catchier than that other of hers that everyone went crazy over AND the video had Tom Hanks being cute:


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