Chapter 10 - Externalities Flashcards
Externality
The uncompensated impact of one person’s actions on the well-being of a bystander.
With externalities, the market equilibrium is ______?
Not efficient
Social cost of a negative externality:
Private cost of seller + cost to bystanders affected
Internalizing the externality:
Gives buyers & sellers an incentive to take into account the external effects of their actions.
Negative externalities lead markets to produce a ____ quantity than is socially desirable.
Larger
Positive externalities lead markets to produce a _____ quantity than is socially desirable.
Smaller
To remedy, Gov’t can internalize the externality by ______ goods that have negative externalities & ______ goods that have positive externalities.
Taxing, subsidizing
Technology Spillover
The impact of one firm’s research & production efforts on other firm’s access to technological advance.
Industrial Policy
Gov’t intervention that aims to promote technology - enhancing industries
Command-and-control policies
Regulate behavior directly
Market-based policies
Provide incentives so that private decision makers will choose to solve the problem on their own
Corrective tax
A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality - Pigovian tax (raises revenue for gov’t).
Ideal corrective tax = ?
External cost
Ideal subsidy = ?
External benefit
Pollution Permit
Supply curve = perfect inelastic, quantity of pollution is fixed by number of 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 the parties incur in the process of agreeing to & following through on a bargain
