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An [[externality]] is an economic side-effect - the effects of an economic activity  has on others, which is not captured in the price of the activity <ref>http://www.dictionaryofeconomics.com/article?id=pde2008_E000200&q=externality</ref>.

An [[externality]] is an economic side-effect - the effects of an economic activity  has on others, which is not captured in the price of the activity <ref>http://www.dictionaryofeconomics.com/article?id=pde2008_E000200&q=externality</ref>.

A widely used example of an externality is [[pollution]]: pollution is an unavoidable byproduct in many industries, and in the absence of regulation, most polluting firms will do little, if anything, to control their pollution, because abating pollution often incurs costs and reduces [[profit]]s. But pollution can have detrimental effects on local, regional, and even world populations and ecosystems, so the cost to society of pollution is usually nontrivial and this societal cost is not something that the firm pays. Pollution is an example of a ''negative externality'', but there are also ''positive externalities''. An example of a positive externality is when a homeowner invests time and money to beautify his or her yard to increase the property value, the values of neighboring properties will increase because the neighborhood is a nicer place to live.

A widely used example of an externality is [[pollution]]: pollution is an unavoidable byproduct in many industries, and in the absence of regulation, most polluting firms will do little, if anything, to control their pollution, because abating pollution often incurs costs and reduces [[profit]]s. But pollution can have detrimental effects on local, regional, and even world populations and ecosystems, so the cost to society of pollution is usually nontrivial and this societal cost is not something that the firm pays. Pollution is an example of a ''negative externality'', but there are also ''positive externalities''. An example of a positive externality is when a homeowner invests time and money to beautify his or her yard to increase the property value; the values of neighboring properties will increase because the neighborhood is a nicer place to live.

When a government decides to intervene to correct an externality (known as "internalizing" the externality), it has a number of options. One option is to clearly define property rights, as described in the [[Coase theorem]]. Alternatively, behaviors that cause negative externalities are often [[tax]]ed while behaviors that cause positive externalities are often [[subsidy|subsidized]]<ref>Mankiw, N. Gregory.<i>Principles of Economics</i> (Second Ed.). 2008. South-Western College Publications. ISBN:978-0324589979</ref>. Even though these methods can be sound economic policy, they can be controversial<ref>Baumol, William J. "On Taxation and the Control of Externalities." 1972.  <i>The American Economic Review</i>, Vol. 62, No. 3, pp. 307-322.</ref>. Other solutions, each with their own pros and cons, include a cap-and-trade system (e.g. the one implemented in the U.S. to controll sulfur dioxide pollution<ref>U.S. Environmental Protection Agency. "Acid Rain Program 2007 Progress Report." http://www.epa.gov/airmarkt/progress/arp07.html</ref>), government provision (e.g. [[public school]]), and oughtright criminilization of an activity.

When a government decides to intervene to correct an externality (known as "internalizing" the externality), it has a number of options. One option is to clearly define property rights, as described in the [[Coase theorem]]. Alternatively, behaviors that cause negative externalities are often [[tax]]ed while behaviors that cause positive externalities are often [[subsidy|subsidized]]<ref>Mankiw, N. Gregory.<i>Principles of Economics</i> (Second Ed.). 2008. South-Western College Publications. ISBN:978-0324589979</ref>. Even though these methods can be sound economic policy, they can be controversial<ref>Baumol, William J. "On Taxation and the Control of Externalities." 1972.  <i>The American Economic Review</i>, Vol. 62, No. 3, pp. 307-322.</ref>. Other solutions, each with their own pros and cons, include a cap-and-trade system (e.g. the one implemented in the U.S. to control sulfur dioxide pollution<ref>U.S. Environmental Protection Agency. "Acid Rain Program 2007 Progress Report." http://www.epa.gov/airmarkt/progress/arp07.html</ref>), government provision (e.g. [[public school]]), and oughtright criminilization of an activity.

===Market Power===

===Market Power===

The [[free rider]] problem, where someone benefits without paying, is common with public goods. Because this can lead to underproduction/underdevelopment of public goods (and services), the government often provides such goods or services (e.g. national defense, public parks, the internet). Economist [[Ronald Coase]] has argued that some public goods can be effectively privatized<ref>"The Lighthouse Logo." The Independent Institute. http://www.independent.org/aboutus/lighthouse.asp</ref>.

The [[free rider]] problem, where someone benefits without paying, is common with public goods. Because this can lead to underproduction/underdevelopment of public goods (and services), the government often provides such goods or services (e.g. national defense, public parks, the internet). Economist [[Ronald Coase]] has argued that some public goods can be effectively privatized<ref>"The Lighthouse Logo." The Independent Institute. http://www.independent.org/aboutus/lighthouse.asp</ref>.

The [[tragedy of the commons]] can be the result of a common-pool resource being exploited by many parties acting in their own self-interest. Privitization of a common-pool resource - with singular ownership - can eliminate the likelihood that a resource will be overexploited (exploited at a rate that does not maximize total benefits) or depleted, but there are often significant logistical issues with this. Political scientist Elinor Ostrom has developed design principles for common-pool resource management, which include clearly defined boundaries and rules regarding appropriation and revision of resources, effective monitoring, and sanctions for violators<ref>Ostrom, Elinor. <i>Governing the Commons: The Evolution of Institutions for Collective Action</i>. 1990. Cambridge University Press. ISBN:0521405998</ref>. These principles can be used by governments or by a group of interested parties creating community organizations.

The [[tragedy of the commons]] can be the result of a common-pool resource being exploited by many parties acting in their own self-interest. Privitization of a common-pool resource - with singular ownership - can eliminate the likelihood that a resource will be overexploited (exploited at a rate that does not maximize total benefits) or depleted, but there are often significant logistical issues with this. Political scientist Elinor Ostrom has developed design principles for common-pool resource management, which include clearly defined boundaries and rules regarding appropriation and revision of resources, effective monitoring, and sanctions for violators<ref>Ostrom, Elinor. <i>Governing the Commons: The Evolution of Institutions for Collective Action</i>. 1990. Cambridge University Press. ISBN:0521405998</ref>. These principles can be used by governments or by a group of interested parties creating a community organization.

==References==

==References==