Externalities A cost borne by people who neither produce nor consume the good Example: Pollution a Caused by the absence of well-defined property rights Government regulations may induce the socially efficient level of output by forcing firms to internalize pollution costs The Clean air Act of 1970 Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Externalities • A cost borne by people who neither produce nor consume the good. • Example: Pollution  Caused by the absence of well-defined property rights. • Government regulations may induce the socially efficient level of output by forcing firms to internalize pollution costs  The Clean Air Act of 1970