Externalities and Public Goods - End of Chapter Problem
Each of the given scenarios involves an externality. Classify each scenario based on whether or not it is likely that private bargaining could be used to achieve a socially optimal outcome in each case.
Likely Not likely
LaShawn's neighbor mows his lawn Opening an Apple store in a mall causes
during the night. overall sales in the mall to increase by 10%.
The production of steel results in
pollution that affects millions of
residents in the surrounding area.

DEPENDING ON HOW OFTEN LASHAWN'S NEIGHBOR MOWS HIS LAWN, A PRIVATE BARGAINING MIGHT BE USEFUL. IF THIS HAPPENS ONCE A MONTH, THE NEED OF INTERVENTION IS NOT SIGNIFICANT. BUT IF THIS HAPPENS MORE OFTEN, PROBABLY THEN BOTH MEIGHBORS WILL NEED TO BARGAIN AN OPTIMAL SOLUTION.

Opening an Apple store in a mall causes overall sales in the mall to increase by 10%.

THIS IS A POSTIIVE EXTERNALITY, THEREFORE, ANY TYPE OF INTERVENTION WILL PROBABLY MAKE THE SITUATION WORSE.

The production of steel results in pollution that affects millions of residents in the surrounding area.

IN THIS CASE, YOU NEED GOVERNMENT INTEREVENTION. POLUTION IS SOMETHING THAT AFFECTS THE GEENRAL PUBLIC, THEREFORE, IT MUST BE ADDRESSED BY THE EPA. IN CASE THE EPA AND OTHER GOVERNMENT INSTITUTIONS DECIDE TO DO NOTHING, THEN YES, PRIVATE BARGAINING WILL PROBABLY BE NECESSARY.