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Chapter 5
Externalities
Problems and Solutions
Jonathan Gruber
Public Finance and Public Policy
Aaron S. Yelowitz - Copyright 2005 © Worth Publishers
Introduction
 Externalities arise whenever the actions of one
party make another party worse or better off, yet the
first party neither bears the costs nor receives the
benefits of doing so.
 As we will see, this represents a market failure for
which government action could be appropriate and
improve welfare.
Introduction
 Externalities can be negative or positive:


Acid rain, global warming, pollution, or a neighbor’s
loud music are all negative externalities.
Research and development or asking good questions
in class are positive externalities.
Introduction
 Consider global warming, a negative externality.
Many scientists believe this warming trend is caused
by human activity, namely the use of fossil fuels.
 These fuels, such as coal, oil, natural gas, and
gasoline produce carbon dioxide that in turn traps
heat from the sun in the earth’s atmosphere.
 Figure 1 shows the trend in warming over the last
century.
This table shows the global
temperature during the 20th century.
Figure 1
Global Average Temperature Over Time
58
There has been a distinct trend
upward in temperature
57.5
57
56.5
Year
2000
1990
1980
1970
1960
1950
1940
1930
1920
1910
1900
1890
56
1880
Global average temperature
58.5
Introduction
 Although this warming trend has negative effects
overall on society, the distributional consequences
vary.


In much of the United States, warmer temperatures
will improve agricultural output and quality of life.
In Bangladesh, which is near sea-level, much of the
country will be flooded by rising sea levels.
 If you’re wondering why you should care about
Bangladesh, then you have identified the market
failure that arises from externalities.
 From your private perspective, you shouldn’t!
EXTERNALITY THEORY
 Externalities can either be negative or positive, and they can
also arise on the supply side (production externalities) or the
demand side (consumption externalities).
 A negative production externality is when a firm’s
production reduces the well-being of others who are not
compensated by the firm.
 A negative consumption externality is when an
individual’s consumption reduces the well-being of others
who are not compensated by the individual.
 The basic concepts in positive externalities mirror those in
negative externalities.
Economics of Negative Production
Externalities
 To understand the case of negative production
externalities, consider the following example:


A profit-maximizing steel firm, as a by-product of its
production, dumps sludge into a river.
The fishermen downstream are harmed by this activity, as the
fish die and their profits fall.
 This is a negative production externalities because:
 Fishermen downstream are adversely affected.
 And they are not compensated for this harm.
 Figure 2 illustrates each party’s incentives in this situation.
SMC = PMC +
MD
Price
of steel
S=PMC
TheThe
yellow
steeltriangle
firm sets
is the
consumer
PMB=PMC
andto
producer
find
its firmoptimal
The
steel
socially
overproduces
level of
privately
surplus
optimal
at Q
. society’s
1profit
from
production
is at
viewpoint.
Q2, the
maximizing
output,
This
Theframework
marginal damage
does
notQ1. of SMC and SMB.
intersection
The red triangle is the
curve
capture
(MD)
therepresents
harm donethe
to
The social marginal cost deadweight
is
loss from the
fishery’s
the fishery,
harm
however.
per unit.
the sum of PMC and MD, and
private production level.
represents the cost to society.
MD
p2
p1
D = PMB =
SMB
0
Figure 2
Q2
Q1
Negative Production Externalities
QSTEEL
Economics of Negative Production
Externalities
 The steel firm’s privately optimal production solves:
PMB  PMC
 This yields a quantity of steel Q1 at a price of P1.
Economics of Negative Production
Externalities
 The steel firm’s emits pollution causing damage to
the fishery. This is represented by the marginal
damage curve. Ideally, the fishery prefers:
MD  0
 This would yield zero steel production, which is
obviously not in the steel firm’s best interests.
Economics of Negative Production
Externalities
 The social marginal cost accounts for both the
direct costs to the steel firm and the indirect harm
to the fishery:
SMC  PMC  MD
 We find the socially optimal quantity of steel Q2 at a
price of P2, by solving:
SMC  SMB
Economics of Negative Production
Externalities
 The socially optimal quantity entails less production
of steel. By doing so, the steel firm would be worse
off but the fishery would be better off.

Graphically, this triangle in between the PMB and
PMC curves from Q2 to Q1.
 The damage to the fishery is reduced as well.

Graphically, this is the area under the MD curve
from Q2 to Q1.
Economics of Negative Production
Externalities
 The deadweight loss from the original production
level Q1 is graphically illustrated as the triangle in
between the SMC and SMB curves from Q2 to Q1.
 Note that the SMB equals the PMB curve in this
case.
Negative Consumption Externalities
 We now move on to negative consumption
externalities. Consider the following example:


A person at a restaurant smokes cigarettes.
That smoking has a negative effect on your
enjoyment of the restaurant meal.
 In this case, the consumption of a good reduces the
well-being of someone else.
 Figure 3 illustrates each party’s incentives in the
presence of a negative consumption externality.
Price of
cigarettes
S=PMC=SMC
The The
yellow
smoker
triangle
sets
is the
surplus
PMB=PMC
to thetosmokers
find his
privately
(and producers)
optimal quantity
at Q1.
of
cigarettes,
The
ThisThe
MD
framework
curve
represents
does Q
not
1.benefit is
social
marginal
the
capture
nonsmoker’s
harmharm
done
per
to PMB
the the
difference
between
The red triangle is the
non-smokers,
pack of cigarettes.
however.
and MD.
deadweight loss from the
private
production
The
The socially
smoker
optimal
consumes
leveltoo
of level.
MD
manysmoking
cigarettes
is at
from
Q2,society’s
the
intersection
viewpoint.
of SMC and SMB.
p1
p2
D=PMB
SMB=PMB-MD
0
Figure 3
Q2
Q1
Negative Consumption Externalities
QCIGARETTES
Negative Consumption Externalities
 The smoker’s privately optimal quantity solves:
PMB  PMC
 This yields a quantity of cigarettes Q1 at a price of
P1. The surplus is the same as before.
Negative Consumption Externalities
 The smoker’s consumption causes damage to the
other restaurant patrons. They would prefer:
MD  0
 This would yield zero cigarette smoking, which is
detrimental to the smoker.
Negative Consumption Externalities
 The social marginal benefit accounts for both the
direct benefit to the smoker and the indirect harm
to the other patrons:
SMB  PMB  MD
 We find the socially optimal quantity of cigarettes
Q2 at a price of P2, by solving:
SMC  SMB
Negative Consumption Externalities
 The socially optimal quantity entails less smoking.
By doing so, the cigarette smoker is worse off, but
the other patrons are better off. The surplus to the
smoker (and tobacco companies) falls.

Graphically, this is the triangle in between the PMB
and PMC curves from Q2 to Q1.
 The harm to other restaurant patrons is reduced as
well.

Graphically, this is the area under the MD curve
from Q2 to Q1.
Negative Consumption Externalities
 The deadweight loss from the original consumption
level Q1 is illustrated graphically as the triangle in
between the SMC and SMB curves from Q2 to Q1.
 Note that the SMC equals the PMC curve in this
case.
The Externality of SUVs
 Consider a real-life example: the use of sport utility
vehicles (SUVs). They create three sorts of
externalities:



Environmental externalities: They consume a lot of
gasoline and create more pollution.
Wear and tear on roads: SUV drivers do not bear the
costs that result from their vehicles.
Safety externalities: When SUVs are in accidents, the
other drivers are often more severely injured.
Positive Externalities
 Positive externalities can occur in production or
consumption.
 A positive production externality is when a firm’s
production increases the well-being of others, but the firm is
not compensated by those others.

Research and development is a production externality.
 A positive consumption externality is when an individual’s
consumption increases the well-being of others, but the
individual is not compensated by those others.

Nice landscaping could be a consumption externality.
Positive Externalities
 Let’s consider positive production externalities.
Consider the following example:


A policeman buys donuts near your home.
As a consequence, the neighbors are safer because of
the policeman’s continued presence.
 In this case, the production of donuts increases the
well-being of the neighbors.
 Figure 4 illustrates each party’s incentives in the
presence of a positive production externality.
Price of
donuts
S = PMC
The
Thedonut
yellowshop
triangle
setsisPMB
the
=consumer
PMC to find
anditsproducer
privately
optimal
surplus
profit at
maximizing
Q 1.
Q1.not
This
Theframework
external
marginal
does
The red triangle
is
theoutput,
benefit
capture
(EMB)
the
represents
to the The
deadweight loss
from
thebenefit
The
donut
socially
shop
optimal
underproduces
level of
the
neighbors,
neighbor’s
benefit.
SMC
= PMC private production
level. however.
donuts
fromissociety’s
at Q2, the
viewpoint.
intersection
p1
of SMC andEMB
SMB.
EMB
p2
The social marginal cost
subtracts EMB fromDPMC.
= PMB =
SMB
0
Figure 4
Q1
Q2
Positive Production Externalities
QDONUTS
Positive Externalities
 The donut shop’s privately optimal production
solves:
PMB  PMC
 This yields a quantity of donuts Q1 at a price of P1.
Positive Externalities
 The shop creates positive externalities to the
neighbors through the presence of police. This is
represented by the external marginal benefit.
Ideally, the neighbors prefer:
EMB  0
 This would yield much more donut production,
which is obviously not in shop’s best interests.
Positive Externalities
 The social marginal cost accounts for both the
direct costs to the donut shop and the indirect
benefit to the neighbors:
SMC  PMC  EMB
 We find the socially optimal quantity of donuts Q2
at a price of P2, by solving:
SMC  SMB
Positive Externalities
 The socially optimal quantity entails more
production of donuts. By doing so, the donut shop
would be worse off but the neighbors would be
better off. The consumer and producer surplus fall.

Graphically, this triangle is between the PMC and
PMB curves from Q1 to Q2.
 The benefit to the neighbors is increased as well. It
goes up.

Graphically, this is the area under the EMB curve
from Q1 to Q2.
Positive Externalities
 The deadweight loss from the original donut
production level Q1 is graphically illustrated by the
triangle in between the SMB and SMC curves from
Q1 to Q2.
 Note that the SMB equals the PMB curve in this
case.
Positive Externalities
 Finally, there can be positive consumption
externalities.
 A neighbor’s improved landscape is a good example
of this.
 The graphical analysis is similar to negative
consumption externalities, except that the SMB
curve shifts outward, not inward.
Positive Externalities
 The theory shows that when a negative externality is
present, the private market will produce too much
of the good, creating deadweight loss.
 When a positive externality is present, the private
market produces too little of the good, again
creating deadweight loss.
The Solution (Coase Theorem)
 The Coase Theorem: When there are well-defined
property rights and costless bargaining, then
negotiations between the parties will bring about the
socially efficient level.
 Thus, the role of government intervention may be
very limited—that of simply enforcing property
rights.
The Solution (Coase Theorem)
 Consider the Coase Theorem in the context of the
negative production externality example from
before.
 Give the fishermen property rights over the amount
of steel production.
 Figure 5 illustrates this scenario.
SMC = PMC +
This bargaining processMD
will
until
theissocially
The gain
to society
is area,
this area,
Thecontinue
gain
to society
this
level.
the efficient
difference
between
the difference
between
(PMB(PMB
PMC)
PMC)
andand
MDMD
for for
thethe
firstsecond
unit. unit.
Price
of steel
p2
S = PMC
The
If the
reason
fisheryishad
because
property
any
rights,
steel itproduction
would initially
makes
impose
the
p1
zero
fishery
steelworse
production.
off.
MD
Thus,
While
But
While
there
itthe
is possible
is
fishery
the
still
room
fishery
room
suffers
to
forbargain.
suffers
to
the
bargain.
only
steel
the
Thus,
itThere
is
possible
for
the
steel
a The
modest
firm
same
steel
to steel
“bribe”
amount
damage
firm
firm
gets
the
of
gets
fishery
as
damage.
a lot
from
ainbit
ofinthe
less
firm
toThe
“bribe”
the
fishery
order
surplus
surplus
to produce
from
from
first
the
the
the
unit.
first
second
next
unit.
unit.
unit.
order
to
produce
the
first
unit.
0
Figure 5
1
2
Q2
Q1
D = PMB
SMB
QSTEEL
Negative Production Externalities and Bargaining
The Solution (Coase theorem)
 Through a process of bargaining, the steel firm will
bribe the fishery to arrive at Q2, the socially optimal
level.
 After that point, the MD exceeds (PMB - PMC), so
the steel firm cannot come up with a large enough
bribe to expand production further.
The Solution (Coase Theorem)
 Another implication of the Coase Theorem is that
the efficient solution does not depend on which
party is assigned the property rights, as long as
someone is assigned them.
 The direction in which the bribes go does depend
on the assignment, however.
 Now, let’s give the property rights to the steel firm
over the amount of steel production.
 Figure 6 illustrates this scenario.
SMC = PMC +
MD
Price
of steel
S = PMC
This bargaining process will
The gain gain
to society
is this
the
society
is area,
this area,
continueThe
until thetosocially
If the
This
steel
levelfirm
of
production
had property
difference
between
MD and MD
(PMB
the
difference
between
and
efficient
level.
While
While
the
steel
the
steel
firm
firm
suffers
suffers
a
rights,
maximizes
it would
the
consumer
choose
and unit.
PMC)
byinitially
cutting
another
(PMB-PMC)
byloss
cutting
back 1 unit.
only
larger
a
modest
loss
in
profits.
in profits.
producer
Q surplus.
.
p2
1
p1
MD
The
Thus,
The
Thus,
fishery
it is
fishery
itpossible
gets
is possible
gets
the for
same
a lot
the
forofthe
fishery
surplus
fishery
surplus
toas“bribe”
to
cutting
from
“bribe”
the
cutting
back
the
steel
from
steel
back
firmfirm
D=PMB=SMB
to
steel
cutthe
production
back
first
toanother
cut
unit.
back.
by unit.
one unit.
0
Figure 6
Q2
Q1
QSTEEL
Negative Production Externalities and Bargaining
The Solution (Coase Theorem)
 Figure 6 shows that even though the bargaining
process is somewhat different, the socially efficient
quantity of Q2 is achieved.
Problems with Coasian Solutions
 There are several problems with the Coase
Theorem, however.




The assignment problem
The holdout problem
The free rider problem
Transaction costs and negotiating problems
Problems with Coasian Solutions
 The “assignment problem” relates to two issues:


It can be difficult to truly assign blame.
It is hard to value the marginal damage in reality.
Problems with Coasian Solutions
 The “holdout problem” arises when the property
rights in question are held by more than one party.


The shared property rights give each party power
over all others.
This could lead to a breakdown in negotiations.
Problems with Coasian Solutions
 The “free rider” problem is that when an investment
has a personal cost but a common benefit,
individuals will underinvest.

For example, if the steel firm were assigned property
rights and you are the last (of many) fishermen to
pay, the bribe is larger than the marginal damage to
you personally.
Problems with Coasian Solutions
 Finally, it is hard to negotiate when there are large
numbers of individuals on one or both sides.
Problems with Coasian Solutions
 In summary, the Coase Theorem is provocative, but
perhaps not terribly relevant to many of the most
pressing environmental problems.
PUBLIC-SECTOR REMEDIES FOR
EXTERNALITIES
 Coasian solutions are insufficient to deal with large
scale externalities. Public policy makes use of three
types of remedies to address negative externalities:



Corrective taxation
Subsidies
Regulation
Corrective Taxation
 The government can impose a “Pigouvian” tax on
the steel firm, which lower its output and reduces
deadweight loss.
 If the per-unit tax equals the marginal damage at the
socially optimal quantity, the firm will cut back to
that point.
 Figure 7 illustrates such a tax.
SMC=PMC+MD
S=PMC+tax
S=PMC
Price
of steel
The socially optimal level of
production, Q2, then maximizes
profits.
The steel firm initially produces
at QImposing
of PMC
Imposing
aatax
taxequal
shifts
to
thethe
PMC
MD
1, the intersection
and
PMB.curve
shifts
curve
the
upward
PMC
and reduces
such that
steel
it equals
production.
SMC.
p2
p1
D = PMB =
SMB
0
Figure 7
Q2
Pigouvian Tax
Q1
QSTEEL
Corrective Taxation
 The Pigouvian tax essentially shifts the private
marginal cost.
 The firm cuts back output, which is a good thing
when there is a negative externality.
Corrective Taxation
 The steel firm’s privately optimal production solves:
PMB  PMC  tax
 When the tax equals MD, this becomes:
PMB  PMC  MD  SMC
 But this last equation is simply the one used to
determine the efficient level of production.
Subsidies
 The government can impose a “Pigouvian” subsidy
on producers of positive externalities, which
increases its output.
 If the subsidy equals the external marginal benefit at
the socially optimal quantity, the firm will increase
production to that point.
 Figure 8 illustrates such a subsidy.
Price of
donuts
S = PMC
The donut shop initially
a subsidy equal
shifts
choosesProviding
Q1, maximizing
the
to
PMC
EMB curve
shifts downward.
the PMC
its
profits.
curve downward to SMC.
The socially optimal
level of
SMC=PMC-EMB
donuts, Q2, is achieved by such
a subsidy.
p1
p2
D = PMB =
SMB
0
Figure 8
Q1
Pigouvian Subsidy
Q2
QDONUTS
Subsidies
 The subsidy also shifts the private marginal cost.
 The firm cuts expand output, which is a good thing
when there is a positive externality.
Subsidies
 The donut shop’s production solves:
PMB  PMC  subsidy
 When the subsidy equals EMB, this becomes:
PMB  PMC  EMB  SMC
 But this last equation is simply the one used to
determine the efficient level of production.
Regulation
 Finally, the government can impose quantity
regulation, rather than relying on the price
mechanism.
 For example, return to the steel firm in Figure 9.
SMC = PMC + MD
S = PMC
Price
of steel
p2
The
Yet firm
the government
has an incentive
couldto
simply require
produce
it toQproduce
no
1.
more than Q2.
p1
D = PMB =
SMB
0
Figure 9
Q2
Q1
Quantity Regulation
QSTEEL
Regulation
 In an ideal world, Pigouvian taxation and quantity
regulation give identical policy outcomes.
 In practice, there are complications that may make
taxes a more effective means of addressing
externalities.
DISTINCTIONS BETWEEN THE PRICE AND
QUANTITY APPROACHES TO ADDRESSING
EXTERNALITIES
 The key goal is, for any reduction in pollution, to
find the least-cost means of achieving that
reduction.
 One approach could simply be to reduce output.
 Another approach would be to adopt pollutionreduction technology.
DISTINCTIONS BETWEEN THE PRICE AND
QUANTITY APPROACHES TO ADDRESSING
EXTERNALITIES
 The models we have relied on so far have examined
reductions in output. Thus, we will modify this.
 Our basic model now examines pollution reduction,
rather than say, steel production.
 Figure 10 illustrates its features.
Since
While
it pays
it faces
for increasing
the pollution
Pollution
reduction
has
a
price
reduction,
marginal the
costs
SMC
from
isreducing
the same
associated
with
it. level.
its pollution
as PMC.
PR
S=PMC=SMC
S=PMC
The
optimal
level of
While
the benefit
of pollution
pollution
reduction
is
therefore
R*.
reduction is zero the firm,
society benefits by MD.
MD =
Thus,
At some
the x-axis
levelalso
of pollution
measuresSMB
The steel firm’s private
pollutionthe
levels
firm
as
has
wethat
achieved
move
marginal benefit from reduction,
pollution
The
good
is being created
On
Such
its an
own,
action
the steel
maximizes
company
itsthe
full
toward
pollution
origin.
reduction
is zero.
isreduction.
“pollution
reduction.”
would set Qprofits.
=0
and
Q
=Q
.
R
Steel
1
D=
PMB
0
PFull
R*
P*
RFull
0
More pollution
Figure 10
Model of Pollution Reduction
QR
DISTINCTIONS BETWEEN THE PRICE AND
QUANTITY APPROACHES TO ADDRESSING
EXTERNALITIES
 As Figure 10 shows, the private market outcome is
zero pollution reduction, while the socially efficient
level is higher.
 In the figure, the optimal tax would simply be MD–
the firm would reduce pollution levels to R*,
because its MC is less than the tax up until that
point, but no further.
 Quantity regulation is even simpler–just mandate
pollution reduction of R*.
DISTINCTIONS BETWEEN THE PRICE AND
QUANTITY APPROACHES TO ADDRESSING
EXTERNALITIES
 Assume now there are two firms, with different
technologies for reducing pollution.
 Assume firm “A” is more efficient than firm “B” at
such reduction.
 Figure 11 illustrates the situation.
Firmthe
B
Firm
has
A’s
relatively
is more
PMCB ToWhile
get
total
For
any
given
output
PMCefficient.
A
inefficient
marginal
cost,
we Bpollution
sum
level,
PMC
>PMCA. S = PMCA + PMCB =
reduction
technology.
horizontally.
SMC
Efficient
is got more
Quantity
If,regulation
instead,
regulation
we
in this
curve is the
where thereduction
marginal
costThe
of SMB
way
from
inefficient,
Firm
A, we
The efficient level
ofis clearly
same
as
before.
pollution
reduction
for
could
since
lower
Firm
B
the
is
total
“worse”
social
at
pollution reduction is
each firm equals
SMB.
reducing
cost.
pollution.
the same as before.
PR
PMCB
PMCA
Quantity regulation could
Imposing
involve equal reductions
in a Pigouvian tax
pollution by bothequal
firms,to MD induces these
such that R1 + R2 = R*.levels of output.
0
Figure 11
RB RA,RA
RB
R*
Two Firms Emit Pollution
MD=SMB
QR
DISTINCTIONS BETWEEN THE PRICE AND
QUANTITY APPROACHES TO ADDRESSING
EXTERNALITIES
 Figure 11 shows that price regulation through taxes
is more efficient than is quantity regulation.
 A final option is quantity regulation with tradable
permits. Idea is to:


Issue permits that allow firms to pollute
And allow firms to trade the permits
DISTINCTIONS BETWEEN THE PRICE AND
QUANTITY APPROACHES TO ADDRESSING
EXTERNALITIES
 As in the previous figure, initially the permits might
be assigned as quantity regulation was assigned.

This means that initially RA = RB.
 But now Firm B has an interest in buying some of
Firm A’s permits, since reducing its emissions costs
PMCB (>PMCA). Both sides could be made better
off by Firm A selling a permit to Firm B, and then
Firm A simply reducing its pollution level.

This trading process continue until PMCB=PMCA.
DISTINCTIONS BETWEEN THE PRICE AND
QUANTITY APPROACHES TO ADDRESSING
EXTERNALITIES
 Finally, the government may not always know with
certainty how costly it is for a firm to reduce its
pollution levels.
 Figure 12 shows the case when the social marginal
benefit is “locally flat.”
PR
In
But
addition,
it is possible
imagine
for that
the
PMC
firm’s
the
government’s
costs
to
be
PMC
best2.2
Then
Suppose
therethe
is large
true
guess of costs is PMC1.
deadweight
costs are PMC
loss.
PMC1
2.
This results in a
much smaller DWL,
If, instead, theFirst,
and much less
This could
assume
be the
government
levied
a
pollution reduction.
SMB
caseisfor
downward
global
tax, it would equal
sloping,
warming,
but for
fairly
MD at QR = R1. example.
flat.
Regulation
mandates R1.
0 R3
PFull
R1
MD =
SMB
RFull
0
More pollution
Figure 12
Model with Uncertainty and Locally Flat Benefits
QR
DISTINCTIONS BETWEEN THE PRICE AND
QUANTITY APPROACHES TO ADDRESSING
EXTERNALITIES
 Figure 13 shows the case when the social marginal
benefit is “locally steep.”
In
But
addition,
it is possible
imagine
for that
the
PMC
firm’s
the
government’s
costs
to
be
PMC
best2.2
Then
Suppose
therethe
is small
true
guess of costs is PMC1.
deadweight
costs are PMC
loss.
PMC1
2.
This results in a
larger DWL, and
If, instead, the
much less pollution
government levied a
reduction.
tax, it would equal
MD at QR = R1.
PR
Regulation
mandates R1.
First,
This could
assume
be the
SMB
caseisfor
downward
nuclear
sloping,
leakage,
andfor
fairly
example.
steep.
MD =
SMB
0 R3
PFull
R1
RFull
0
More pollution
Figure 13
Model with Uncertainty and Locally Steep Benefits
QR
DISTINCTIONS BETWEEN THE PRICE AND
QUANTITY APPROACHES TO ADDRESSING
EXTERNALITIES
 These figures show the implications for choice of
quantity regulation versus corrective taxes.

The key issue is whether the government wants to
get the amount of pollution reduction correct, or to
minimize firm costs.
 Quantity regulation assures the desired level of
pollution reduction. When it is important to get the
right level (such as with nuclear leakage), this
instrument works well.
 However, corrective taxation protects firms against
large cost overruns.
Recap of Externalities:
Problems and Solutions
 Externality theory
 Private-sector solutions
 Public-sector solutions
 Distinctions between price and quantity approaches
to addressing externalities