ch 10: externailities Flashcards
externality
the uncompensated impact of on person’s actions on the well being of a bystander
is market equilibrium efficient without externailites
no
why does the government regulate negative externailites
because people don’t take them into account
how do you find the optimum quantity to supply considering negative externailities
- social curve is to left of supply curve representing the social cost of negative externailites
- where the demand curve crosses the social curve = optimal supply
internalizing the externaility
- altering incentives so that people take account of the external effects of their actions
- ex: taxing the supply of a good that causes negative externailites
how do you find the optimum quantity to supply considering positive externailities
- the social curve is to the right of the supply curve
- where the demand curve crosses the social curve
what are the two ways the government responds to externailites
1) command-and-control policies(regulation)
2) Market-Based policy (corrective taxes and subsidies, pollution permits)
corrective tax
a ta designed to induce private decision makers to take account of the social costs that arise from a negative externality
an ideal corrective tax would equal
the external cost from an activity with a negative externaility
which is more effective in reducing negative externailites: a tax, or a regulation
a tax
what are two ways that the govt can regulate pollution completly
- a corrective tax
- supply of pollution permits
coase theorem
-the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
transaction costs
the costs that parties incur in the process of agreeing to and following through on a bargain
does the coase theorem always work?
-no, sometimes people can’t reach a bargain
