What is an externality? Provide at least three examples. How does one of the examples you provided affect the market outcome? What is the role of government in addressing the implications of an externality you provided as an example? Is it possible that a government's solution to a market failure would worsen the failure? Explain your answer.
a. Government regulations can deal with negative externalities such as auto emissions. Auto manufacturers must continue to improve the fuel efficiency of vehicles, and at the same time, reduce emissions. What sort of incentives can be used to improve fuel economy? Explain your answer.
b. A good example of a positive externality is a college education. An individual incurs all of the private costs of pursuing a degree. The local community does not bare any of the education costs, but an educated person tends to be a more productive member of society. The community benefits from a college educated citizen. In this case, should society pick up some of the costs through scholarships? Would locally sponsored scholarships help internalize the externality?
c. Did government bailouts really cause the recession? Would it be possible poor lending practices, overvalued houses, and creating risky mortgage backed securities from risky loans caused the Great Recession? What potentially would have happened if the government did not bailout banks?
d. We can assume the United States is making progress in becoming more green so to speak. However, countries like India and China are still developing their economies. Environmental pollution is a big problem for developing economies. Should countries like the United States help out? What could we do to encourage developing countries to modernize along an ecofriendly growth path?