Externalities impose costs or benefits on a third party not directly involved in an economic transaction. Without market intervention, both negative and positive externalities result in inefficient market outcomes. In an efficient market, firms produce where the market demand for the good equals the social marginal cost. [Section 17.1]
Regulators can use quantity-
The Coase theorem predicts that in the absence of transaction costs, negotiation among economic actors will lead to efficient outcomes regardless of who holds the property rights, and is used as the basis for a frequently used strategy to combat pollution: tradable permits. [Section 17.3]
All public goods are characterized by two properties. First, public goods are nonrival, meaning one consumer’s enjoyment of the good does not diminish another’s enjoyment of it. Second, public goods are nonexcludable, that is, once a public good is on the market, it is impossible to prevent people from consuming it. Because of these two properties, public goods create a free-