Course: Principles of Microeconomics (ECON 1) · Silver Oak University (fictional sample) · Prof. Kessler
Focus: Externalities, Public Goods & Market Failure · Objective 8 · SLO A & B

Module Overview Page — "Start Here" (Canvas: Page, published)

Week 14 — Externalities, Public Goods & Market Failure

Markets are remarkable — but they fail in predictable, fixable ways. This week you'll study the most important categories of market failure: externalities (costs or benefits that spill over to people outside the transaction), public goods (things markets systematically underprovide), and common resources (things markets systematically overuse). You'll also meet the two main policy fixes — the Pigouvian tax and the Coase theorem — and practice the externality graph that appears on virtually every principles exam.

The big question: When do markets get the quantity wrong — and what can be done about it?

By the end of this week, you can:

• distinguish negative and positive externalities and explain the direction of the market failure (over- or underproduction);
• find the market equilibrium (MB = MPC) and the social optimum (MB = MSC) on a graph;
• calculate the Pigouvian tax (= marginal external cost) that corrects a negative externality, and know the subsidy counterpart;
• state the Coase theorem and its conditions;
• classify a good as private, public, common resource, or club good using the rival/excludable grid;
• explain the free-rider problem and the tragedy of the commons.

Do this, in order:

1. Read & watch — the Week 14 resources (≈40 min). → Readings & Resources page
2. Lecture Tutorial — work through externalities and public goods with your AI tutor (≈45 min). Due Sun, Dec 6. → submit the chat share link + summary
3. Practice Exercises — 6 quick reps, ungraded (≈15 min).
4. Quiz 14 — 10 questions, closed to AI (≈20 min). Due Sun, Dec 6.
5. Discussion 14 — "Carbon pricing: tax, cap-and-trade, regulation, or none?" Initial post Fri, Dec 4, replies Sun, Dec 6.
6. Assignment 14 — the externalities & public goods problem set (100 pts). Due Sun, Dec 6.
7. Workshop 14 — Graph & Model Workshop — find the social optimum and the DWL of a negative externality (50 pts). Due Sun, Dec 6.

A note before you start: this is the week the whole "markets are efficient" story gets qualified. The externality diagram is just supply and demand with one extra line — but reading it correctly (market Q vs. social Q, tax vs. subsidy, DWL) is where most students slip up. Work every number yourself before you audit the AI.

Welcome Announcement (Canvas: Announcement; available_from_offset_days = 0 — posts Mon, Nov 30)

Subject: Week 14 — When markets get it wrong (and what to do about it)

Hi everyone,

We've spent the term learning how competitive markets allocate resources efficiently. This week we ask: what happens when they don't? The answer is market failure — and the clearest example is an externality: when a buyer and seller strike a deal that dumps costs (or confers benefits) on people who never sat at the table.

The negative-externality story is one graph: the market settles at MB = MPC and ignores the external cost, so it overproduces relative to the social optimum at MB = MSC. A well-designed tax — exactly equal to the external cost — shifts the supply curve up by the right amount and restores the efficient quantity. The rest of the week extends the logic: public goods, common resources, and the Coase theorem.

This week, don't miss:

• Why a negative externality → overproduction → Pigouvian tax (not a subsidy), and why a positive externality → underproduction → subsidy (not a tax). The direction matters.
• The two-by-two grid of rival/excludable — it classifies every good type and tells you which failure to expect.
• Discussion 14 — carbon pricing. There are genuine trade-offs among a carbon tax, cap-and-trade, and direct regulation; we'll reason through them evenhandedly.

See you in class,
Prof. Kessler