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Voluntary exchange will only take place if both parties perceive that theyre better off. Sometimes these exchanges result in spillovers. We call these spillovers externalities. If a spillover is beneficial, we call these positive externalities. If theyre costly, we call them negative externalities. Lets talk about negative externalities for a minute. Imagine being a corn farmer and growing corn. What are the private costs that you face that help you determine how many ears of corn to grow? Things like fuel, seed, fertilizer; these are your private costs. But it turns out that every spring and summer when you lay down the fertilizer some of this flows into the stream nearby and flows into a lake downstream, oftentimes resulting in large fish kills. All those downstream, the fisherman, the recreationist, and the landowners all incur a negative externality. There are three broad categories of ways in which we can address these externalities. The first is taxation, the second, regulatio
