Externalities and the Limits of Markets
A local government is thinking of prohibiting smoking in restaurants. Check the following arguments for their economic correctness. Assume that, by smoking, smokers have a negative interdependence with non-smokers.Now, assume that smokers and non-smokers negotiate in a restaurant and strike a deal. The smokers receive the right to smoke or the non-smokers receive the right for the smoking to cease.
The originator of the external effect and the originator of the interdependency are one and the same.
Interdependencies are external effects that have not been internalized.
The Coase Irrelevance Theorem states that, in an economy with fully allocated property rights, the market equilibrium is always efficient.
If a group of individuals suffers from air pollution caused by a local chemical factory, this is a negative external effect.