Q15-Micro

====Externalities are cost or benefit imposed without compensation on third parties by the production or consumption of sellers or buyers. Externalities arise when the market clearing price creates benefits or costs on a third party. There are two types of externalities: positive externalities and negative externalities. Positive externalities arises when the marginal social benefit is greater than the marginal private benefit. In a positive externality, a benefit is imposed on third parties. Negative externalities arises when the marginal social cost is greater than the marginal private cost, and in this case a cost is imposed on the third parties.====

====According to the Coarse Theorem, governments should not involve themselves in markets when property ownership is clearly defines, the number of people involved is small, and bargaining costs are negligible. When the situation does not meet the requirements of the Coarse Theorem, government should involve themselves with externalities. Governments can impose legislation and regulation on the goods. They can ban the production or consumption of certain goods which create negative externalities, and they can impose tax to regulate the amount of goods produced. Also, governments may subsidize suppliers, encouraging them to provide goods that create positive externalities.====