H. Externalities and Public Goods

This section of the Handbook treats externalities, that is, situations where the actions of one economic agent affect the well-being of other economic agent in ways not reflected in market transactions. We review the different type of externalities and how they affect the efficiency properties of markets. We discuss alternative ways of eliminating or reducing the effects of externalities via mergers, assignment of property rights, or government regulation.

This section also examines public goods, that is, situations where the good or service produced is nonrival in consumption (one individual’s consumption does not reduce the availability of the good to other consumers) and nonexcludable (not possible to prevent anyone from consuming the product). National defense, street lighting, and fireworks displays are examples of public goods. Public goods are a specific type of positive externality.