Chapter 10

Chapter ten introduces a reason of why a market, even if it is at an equilibrium quantity and price, can be inefficient. A market equilibrium is not efficient in the presence of externalities (uncompensated impact of one person's actions on the well being of a bystander) because buyers and sellers neglect external effects and fail to maximize total benefit to society as a whole. This can be fixed by internalizing the externality which is basically altering incentives so that people take into account the external effects of their actions. Remedies  include taxing a negative externality and subsidizing a positive externality.  Public policies include regulation. In the case of pollution, the government can tell a factory to reduce its pollution by a certain amount. Regulations, however are not as effective as a corrective tax because once the limit/target is reached factories have no reason to continue reducing emission whereas a tax gives factories the incentive to reduce pollution. Aside from taxing or regulating chapter 10 also mentioned the Coase theorem which proposes that if private parties can bargain without the cost over allocation of resouces. they can solve the problwem of externalities on their own.