Regulating Market Externalities

This lecture discusses the concept of externalities in a market, focusing on the impact of external costs on market equilibrium. It explores the use of taxes, subsidies, and tradable quotas as mechanisms to internalize external costs and achieve optimal production levels. The instructor explains how a combination of price caps and quota systems can effectively regulate market outcomes, ensuring that production does not exceed the socially optimal level. The lecture also covers the application of these concepts to cases of external costs on both the demand and supply sides, as well as external benefits. Various scenarios and solutions are presented to illustrate the complexities of regulating market externalities.