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
