Author:  Lori Alden

Audience:  High school and college economics students

Time required:  About 40 minutes

NCEE Standards16, 17

Summary:  Economists tend to frown on the use of regulations to control externalities. This exercise demonstrates that good regulations are difficult to design.

Instructions:  Assign students to small groups of 3-5 and give each of them a copy of the following handout.  Have representatives from the groups present their findings to the class.


Imagine what it would be like if we tried to control all external costs with regulations.  Here's what some of the regulations might look like:

Rule 13,327.  Alarm clocks.  The clock's sound-generating mechanism must be set to 60 decibels or less if others are sleeping within a 25 foot radius of the clock and choose not to be awakened by it. 

Rule 5,219.  Birthday candles.  The person celebrating his or her birthday (hereinafter known as the Birthday Person) shall spray as little moisture on the cake as possible when blowing out the candles.  The Birthday Person shall refrain from blowing out the candles if he or she has a cold, flu, or other contagious disease.

1.  Suppose the Birthday Person has athlete's foot  ─  a contagious disease.  Does that means she shouldn't blow out her birthday candles? 

2.  Think of other situations in which these rules wouldn't work well, then amend the rules to allow for these situations.

3.  Do you think the government should attempt to control these types of externalities?  If not, how should they be controlled?


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