What The People Can Do :
Externalities may result in market resources being allocated inef?ciently, but
that’s not to say that us students can do nothing about it.
Private Solutions to Externalities :
• Morals : In some cases, externalities can be avoided by individuals’ moral
codes. As a result of parental guidance and advertising, people become aware
of social norms and so decide against engaging in certain activities that would
create negative externalities. For example, most individuals choose not to
vandalize property as they know it is morally wrong to do so.
• The Private Market : When two separate parties form an agreement in which
both of them bene?t, the problem of externalities can be resolved. (See ‘The
Coase Theroem” below.)
• Charities and Donations : Many charitable organizations are established in
order to deal with the problem of externalities. For example, the charity
‘Trócaire’ is concerned with solving the problems of world hunger and poverty
which have, in part, been caused by the unequal division of wealth between
the ?rst and third worlds.
The Coase Theorem = The proposition that if private parties can bargain
without cost over the allocation of resources, they can solve the problem of
externalities on their own, and allocate resources ef?ciently.
The Coase Theorem sounds like the perfect solution to the problem of
externalities, I mean, why are we even bothering to study them any further?
Unfortunately, we are doing this because there are often incidences in which
the Coase Theorem doesn’t work as well as it should. Such incidences occur
due to transaction costs which are incurred during the process of the
negotiations between parties which they are unwilling to pay, asymmetric
information (when people are not aware of the costs and bene?ts of their
actions to each other and exaggeration takes place), negotiations simply
breaking down and the assumption of rational behavior (humans making
illogical solutions in relation to externalities is the Coase Theorem’s downfall
here).