chapter 10: externalities Flashcards
what is an externality?
a side effect of an activity that affects bystanders whose interests are not taken into account
they lead to market failure
what is a negative externality?
a side effect that harms bystanders
choice that impose costs on others
too much is created
what is a positive externality?
a side effect that benefits bystanders
choice that generates benefits for others
too little is created
what is private interest?
costs and benefits that you personally incur
what is society’s interest?
includes all costs and benefits (whether they accrue to you or to others)
what is a marginal private cost?
the extra cost paid by the seller from producing one extra unit
firm’s supply curve
what is the marginal external cost?
the extra cost imposed on bystanders from producing one extra unit
what is the marginal social cost?
all marginal costs, no matter who pays them
what is the formula for marginal social cost?
marginal social cost = marginal private costs + marginal external costs
what is marginal private benefit?
the extra enjoyment by the buyers form purchasing one extra unit
buyers demand curve
what is the marginal external benefit?
the extra benefit accruing to bystanders from one extra unit
what is the marginal social benefit?
all marginal benefits, no matter who gets them
what is the formula for marginal social benefit?
marginal social benefit = marginal private benefit + marginal external benefit
what is the socially optimal quantity?
the quantity that is most efficient for society as a whole, including the interests of buyers, sellers, and bystanders
accounts for all costs and all benefits, regardless of who they fall one
where marginal social benefit = marginal social cost
what is the rational rule for society?
produce more of an item as long as its marginal social benefit is at least as large as the marginal social cost
what happens to the market when there is a negative externality?
there is overproduction
what happens to the market when there is a positive externality?
underproduction
what is the coase theorem?
is bargaining is costless and property rights are clearly established and enforced, then externality problems can be solved by private bargains
what is a side payment?
when private bargaining
if someone else’s actions harm you, you can pay them to do something else instead
or if someone else’s actions benefit you, you can pay them to do more of that action
what is a corrective tax?
when there is a negative externality, set the corrective tax equal to the external cost
this tax incentivizes people to do less of the activity
also called pigouvian tax
what is a corrective subsidy?
when there is a positive externality, set the corrective subsidy equal to the external benefit
this tax incentivizes people to do more of the activity
what is excludable?
when someone can be easily excluded from using something (ex. I can exclude you from using my car by not giving you the keys)
what is nonexcludable?
when someone cannot easily be excluded from using something (ex. you can’t stop your neighbour from also enjoying the fireworks you set in your backyard)
what is rivalrous?
when your use of something comes at someone else’s expense (ex. if I buy a cupcake, then there is one less cupcake available for you to buy and enjoy)
