This chapter focuses on externalities in the context of producing goods and services, but like many concepts in our course, these ideas are very applicable to our daily lives. In this discussion, please:

1. Identify and describe a situation where you have experienced either a positive or negative externality. Please see the "helpful tip" below to avoid making common mistakes.
2. State clearly what the external cost or benefit is.
3. Estimate the dollar value of the externality. You may not be sure how to do this, so consider asking yourself the following: If it's a positive externality, what is the highest price you would be willing to pay for the external benefit you received? If it's a negative externality, what is the lowest price you would be willing to accept as compensation for the external cost you are bearing?
4. How many people in total are affected by this externality? It is essential that you come up with a number of people that are affected; a rough estimate is fine. Recommend either a tax or subsidy amount that the externality creator should pay or receive (to "internalize the externality") based on the number of people affected. You can assume that everyone affected has the same valuation for the externality as you do. If you do not recommend a tax or a subsidy, and the dollar amount of the tax or subsidy, you will lose credit.

Helpful Tip: An externality is a cost or benefit that you experience that you had nothing to do with creating, that was not expected, and that you did not pay for and/or were not compensated for dealing with. Just to be safe, it is probably best if you assert in your writing that whatever your example is could not have been anticipated, you were not compensated for dealing with it, and you did not receive any discounts for dealing with it. Here are a few examples of situations that are not externalities:

• Problems at work, if they were remotely foreseeable. For example, if you work in a customer facing role, and you have an annoying customer... that is not an externality. You are being paid to deal with this. Also, encountering annoying people is foreseeable for a customer service job, so that potential cost is something you considered when taking the job.
• Noisy neighbors, if the noise was not predictable. For example, if you live in an apartment and you can hear your neighbors, that is probably not an externality unless the noise is really out of hand and violates the law (it is reasonable to expect people to follow the law, but not reasonable to expect to have silence while living with nearby neighbors). Since rent for apartments is lower than for single family homes, you are compensated for all of the annoyances that come with apartment living, and they are therefore not externalities. On the other hand, if you live in an area where you would reasonably expect peace and quite, then neighbor noise might be an externality.
• Traffic issues, if they are foreseeable. If you get on a congested freeway at 5:00 on a Friday afternoon, the traffic is not an externality since traffic is a known cost of traveling at rush hour. Traffic delays can be anticipated at rush hour, and are something you consider when deciding when to travel. However, if you get on a freeway at 4:00 in the morning on a Sunday and there is traffic... that probably is an externality since nobody could foresee traffic in that situation.