Ch.5- Externalities, Environmental Policies, and Public Goods Flashcards
Negative externality example
Pollution
Externality
a benefit or cost that affects people who aren’t directly involved in the production/consumption of a good/service
Positive externality example
Education, medical research, etc.
Private cost/benefit
Borne by the producer of a good/service
Social cost/benefit
borne by the consumer of a good/service
Social=
Private + any externality
Market equilibrium is NOT efficient
P efficient and Q efficient is efficient (after you move to the social cost/benefit)
Marginal Social Benefit>Marginal Private Benefit
Positive externality
Marginal private benefit>Marginal social benefit
Negative Externality
Externalities and market failure result from…
Incomplete property rights or from difficulty of enforcing said rights
Externalities in a private market
If too much is produced=negative externality
If too little is produced=positive externality
Market Failure
When a private market fails to produce the efficient level of output
Private solutions to externalities
Bargaining when property rights are well defined
Public solutions (government policies) to externalities
-Taxes
-Subsidies
-Quotas
-Command/Control policies
-Cap and Trade
-Behavioral “Nudges”
The Coarse Theorem
“Can achieve efficient outcome through bargaining (when transaction costs are low)”
*all parties must have full info about costs/benefits
*all parties willing to accept reasonable agreement
Transaction costs
costs in time and other resources that parties incur in trying to agree and carry out an exchange of goods/services
Government policies to deal with externalities
-Taxes can eliminate deadweight loss in negative externalities (can cancel out based on an external)
-Subsidies for positive externalities
Command-and-control approach
When the government imposes quantitative limits on the amount of pollution firms are allowed to emit, or making them install pollution control devices
Rivalry
when one person’s consumption of a unit of a good means no one else can consume it
Excludability
Anyone who doesn’t pay for a good cannot consume it
Private good
Rival AND excludable
example: houses, cars, etc.
Public goods
Non-rival AND non-excludable
example: education, law enforcement
Quasi-Public Goods
Excludable, but non-rival
example: cable tv and tolls
Common goods/resources
Rival, but non-excludable
example: forest land, clean water
