Week 14 — Externalities, Public Goods & Market Failure
Why this matters
A family breathing a workshop's smoke and a fishing town sharing one lake both face a cost that lands outside a market.
In plain language
Some costs and benefits of a trade land on people who were never part of it. When a workshop's smoke drifts over the houses next door, the neighbors pay part of the cost of a good they never bought; that spillover is an externality (a cost or benefit that falls on bystanders). This week you will measure how far a market drifts from the best quantity when it ignores a spillover, and you will see three ways to fix it: a tax, a cap on the total, or a bargain between the people involved. You will also meet goods that markets struggle to supply at all, such as a public good (something anyone can enjoy and no one can be kept from), and shared resources that tend to be used up. Last, you will weigh carbon pricing as a debate with two strong sides.
- Already covered: Week 6 measured surplus; Week 7 taxed this market.
- This week: spillovers, the corrective tax, public goods, and commons.
- How they connect: the same tax now removes a deadweight loss.
- Where we're going next: Week 15 turns to markets where one side knows more.
Focus
Who pays for a cost that lands outside a trade, and what fixes it?
By the end of this module, you should be able to:
- [ ] find the efficient quantity with an external cost
- [ ] compute the deadweight loss of a spillover
- [ ] set a corrective tax per unit
- [ ] sort goods by rival and excludable
To-do
Plan your week
- Read Chapter 14 (45–55 minutes), then the lecture and slides.
- Work the tutorial (60–90 minutes) and practice set (15–25 minutes).
- Do the Model Workshop (90 minutes), discussion, and assignment.
- Take the quiz.
This week's checkpoint: add the harm to supply, find where it meets demand, and name the tax per unit.
You've got this
Count everyone at the table, and ask your instructor early.
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