Olivia Barr, Chapter 3, Question 7

While reading this chapter I gained a broader understanding of how difficult it can be to correct an externality. When there is an externality, it means that one side of the groups involved gains more than the other in social benefits, or the other is suffering a high social cost. Bargaining does not always work. Bargaining with smokers to stop smoking would be relatively difficult because smoking is addictive, and smokers are often not concerned with the effects of second hand smoke on others, therefore they would be unwilling to negotiate some type of policy that would move the equilibrium, social cost/benefit and all, to a more appropriate location. In some externalitites, controversy arises as a third party works to decide who should pay the price so that the externality is eliminated. These are the situations that we often hear about in the media as they relate to politics. On a nearly daily basis, you can find news articles about new taxes on sugar, cigarettes, co2 emissions, or lobbyists pushing for higher subsidies to provide incentive to drive electric cars because their cost is too high for their social benefit. Before reading this chapter I thought of these topics as mundane space fillers for times when nothing important was going on in the news, but now I can look at them as fascinating economic debates, which is pretty cool.