Chapter 10 - Externalities Flashcards
What is an Externality?
The uncompensated impact of one person’s actions on the well-being of a bystander. The government responds by trying to influence this behaviour to protect the interests of bystanders.
What does Internalizing the externality mean?
Altering incentives so that people take account of the external effects of their actions.
What are the differences between positive and negative Externalities?
Negative externalities lead markets to produce a larger quantity than is socially desirable.
Positive externalities lead markets to produce a smaller quantity than is socially desirable.
How can government respond to externalities?
COMMAND-AND-CONTROL POLICIES regular behaviour directly
MARKET-BASED POLICIES provide incentives so that private decision makers will choose to solve the problem on their own.
What is command-and-control policies?
The government can remedy an externality by making certain behaviours either required or forbidden.
EX: It is forbidden to dump poisonous chemicals into the water supply.
What is Market-based Policy?
The government can use market-based policies to align private incentives with social efficiency.
They can impose taxes on activities that have negative externalities and subsidize activities that have positive externalities.
What is Corrective taxes (Pigovian)?
Taxes enacted to correct the effects of negative externalities.
An ideal corrective tax would equal the external cost associated with the activity that generates the negative externality.
Why is internalizing the externality good?
Places a price on the right to pollute, Are better for the environment, Raise revenue for the government, Enhance economic efficiency.
Does the government always need to get involved?
No, in some circumstances, people can develop private solutions such as moral codes and social sanctions, charities, the self-interest of relevant parties, and contracts.
What is the 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.
Whatever the initial distribution of rights, the interested parties can reach a bargain in which everyone is better off and the outcome is efficient.
What are Transaction costs?
The costs that parties incur in the process of agreeing to and following through on a bargain.
More to understand on slides.
Thankyou!
