Chapter 10

Chapter 10 is all about externalities, that is, the unintended consequences/benefits of various economic processes. With positive and negative externalities, society's interest in the market goes beyond the marketplace and instead extends to include the well-being of the bystanders affected indirectly. The book gives a few examples of positive and negative externalities, and it helped to paint a clearer picture in my head. Essentially, Mankiw argues that unlike a standard market, when externalities are involved, the government must consider its role and provide some sort of regulation to adjust the market for maximum social well-being. One possible way to regulate the market is through taxes on markets with negative externalities and subsidies on markets with positive externalities. These are called corrective taxes. With standard taxes in an efficient market with no externalities, the market operates inefficiently. But in a market with externalities, because consumers and producers don't take into account the effects of their actions on bystanders, the market isn't reacting at peak efficiency when it comes to societal well-being. Taxes and subsidies help shift the supply and demand curves in a more positive direction. Then, the positive gain usually outweighs the deadweight loss. But while taxes and subsidies are one way to handle externalities, they can also be handle through the marketplace. This is explained with the pollution permits example, and it was clear to see how again, the people with the most to lose valued the permits the most. Overall, this chapter was pretty easy, and I'd rate it 2/3 in terms of difficulty.