EXTERNALIZATIONS;

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QN 1.
EXTERNALIZATIONS; Is a cost or benefit incurred or received by a third party who has no control over how that cost or benefit was created. Externalities occur in an economy when there production or consumption of a specific good or services impacts a third party who is not directly related to the production or consumption of that goods or services. There two types of externalities which are positive externalities which occur when there is positive gain on both private level and social level and negative externalities which occur when social cost out weight the private cost. Examples of externalities are health care for positive externality and pollution for a negative externality.
Externalities can be solved by both government and people approach but the following are approach or solution used by people to solve the problem of externalities on their own
Moral codes; Guides individuals’ behavior.  Individualknows those certain actions are simply not the right thing to do or would elicit disapproving reaction from others. Example using fines for one going against right thing to do.
Charities; Channel donations from private individuals towards fighting to limit behavior that generates positive externalities
Negotiations among parties; Two business that offer positive externalities to each other  can merge or enter into contract that makes both parties better off.








QN 2.
PRIVATE SOLUTION TO EXTERNALITIES; Are initiative used by individual in solving the problem of externalities. Private solutions to externalities are moral codes, charities and negotiations among parties.
Private solution to externalities sometime do not work due to the following reason
Transaction cost; The cost parties incur in the process of agreeing to and following through on a bargain. These costs may make it impossible to reach mutually beneficial agreed. An example the global warming problem affects millions of people in many nations. The vast number of affected parties could not individually negotiate agreement to solve this problem. Instead they must rely on their government to represent the millions of affected parties and find an acceptable solution
Stubbornness; Even if a beneficial agreement is possible each party may hold out for a better deal
Coordination problem; If number of parties is very large coordinating them be very costly, difficult or impossible.












REFFERENCE
Kreps D.M      (1990) A Course in Microeconomics Theory. Harvester Wheatsheaf. Tokyo.
Layard, P.R.G and Walters A.A (1978) Micro economics Theory, McGraw-Hill International Editions, New York.
Silverberg E   (1990) The structure of Economics: A Mathematical Analysis. McGraw- Hill. New york

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