Courses : Intermediate Microeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Theory of Externalities and Public Goods Externality theory and public goods are important concepts in economics because they influence the way we understand and view the role of government in the economy. 1. Externality Theory The externality theory states that in economic activities, sometimes there are unwanted side effects caused by activities carried out by individuals or companies, both positive and negative. Positive side effects are called positive externalities, while negative side effects are called negative externalities. An example of a positive externality is when someone decides to buy solar panels for his house, so that the energy produced can also help the neighbors around him. An example of a negative externality is when a company dumps toxic waste into a river, which causes the water to become polluted and can endanger the health of the surrounding community. Externality theory states that in this case, the market cannot allocate resources efficiently because the costs and benefits of externalities are not fully considered by buyers and sellers. Therefore, governments can play an important role in countering economic side effects by imposing taxes or subsidies, or by establishing regulations to limit activities that produce side effects. The externality theory is a concept in economics that refers to the side effects of economic activity on people or groups who are not involved in the transaction. These side effects can be positive or negative, and are not always reflected in the market price of the goods or services traded. Examples of positive externalities can be found in investment in infrastructure. When the government builds a road or bridge, it may provide economic benefits for all the people in the area, such as better access to markets or jobs. This is a positive side effect of economic activity. On the other hand, examples of negative externalities can be found in pollution. When factories dump waste into rivers, it can damage the environment and human health, and the costs of these side effects are not always reflected in the price of the products produced by factories. Externality theory suggests that individual economic activities can have a positive or negative impact on others outside the market. In this case, externalities can be divided into two types, namely positive and negative externalities. Positive externalities occur when an individual's economic activity provides benefits to others without asking for anything in return. An example is the activity of planting trees in front of the house which provides the benefits of fresh air for neighbors without asking for payment. Meanwhile, negative externalities occur when an individual's economic activity has a negative impact on other people without paying a fee. An example is air pollution from factories that harms the health of the surrounding community without providing compensation. 2. Public Goods Public goods are goods that no one can get away from, such as national security or street lighting. Their inevitability makes it difficult for the private sector to produce and market public goods, because it is impossible to charge people who do not want to pay for them. Therefore, the government is often the producer of public goods. Public goods are often considered an example of a failed market, because markets cannot allocate resources efficiently in terms of public goods. Therefore, the government has an important role in producing and marketing public goods to the public. Public goods are goods or services that are available for use by everyone and cannot be avoided by one person or group. The main characteristic of public goods is that their use is unavoidable and consumption by one person or group will not reduce the availability of these public goods for others. Examples are public parks or hiking trails that can be used by anyone without cost or interference from others. Unlike personal items such as cars or clothing, people do not have to pay to use public parks or hiking trails, and their use does not affect their availability to others. Because of these special characteristics, markets may not efficiently allocate resources for producing public goods. Therefore, governments are often involved in producing or providing public goods, and the costs are paid for by taxes. An example is the construction of a road or bridge which creates positive side effects for the surrounding community. Other public goods include health, education and national security services, which are considered basic needs of society and the country as a whole. Public goods are goods whose consumption is not limited to one individual or certain group. Public goods have no rivalry in consumption and cannot be excluded from consumption by others. Examples are public roads, coast guard, and national defense. Due to their nonrivalry and non-exclusive nature, public goods cannot be produced efficiently by the market and require the government's role in providing them. In this case, prices cannot be used as an efficient resource allocation tool for public goods because prices cannot express the value of the benefits or losses incurred by public goods. Instead, the allocation of resources for public goods is usually regulated by the government through taxes and public spending. In both of these theories, the government is often seen as a counterweight in an inefficient market. Governments can play an important role in overcoming negative externalities and producing public goods for society, thus increasing overall market efficiency. Externality theory and public goods are two important concepts in economics. Both of these concepts are related to the effect of economic activity on the wider society and how the government can be involved in its regulation. Externality theory and public goods are two important concepts in economics. The externality theory explains how an individual's economic activities can positively or negatively affect the economic activities of others. Meanwhile, public goods are goods whose consumption is not limited to one person or certain group and cannot be excluded from consumption by other people. Overall, the theory of externalities and public goods are two important concepts in modern economics that help explain how economic activities can affect society positively or negatively and how public goods must be generated and managed to achieve economic efficiency.