What do you understand by externalities? Explian the Piguobian method and coase method for dealing with externalities
Answers
Answer:
Pigouvian method is the method of taxing negative externalities, with the intention of correcting an inefficient or undesirable market outcome. According to the Coase theorem, when there are externalities and transaction costs are low, parties will be able to discuss and reach a suitable solution.
Externalities involve the method of buying or manufacturing other products, there are negative and advantageous side effects experienced by people not directly involved in the trade. Those results are called externalities.
Explanation:
Pigouvian Theory:
A Pigouvian tax is a corrective tax that occurs due to negative externality, used to address market failures. Consumer efficiency is poor when there are additional incentives. When you earn a rebate the net value of the products is equivalent.
It changes the curve of demand and makes the industry competitive. Efficient balance is the new market equilibrium. Creation of new markets Coase Theorem If transaction costs are low and property rights are well defined, then personal matters will ensure that market equilibrium is also efficient even if the Coase theorem has externalities.
It is often not possible to explain property rights and decreasing transaction costs, but theorem suggests different approach to externalities.
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