Chapter 11 Flashcards
When there are negative externalities, opportunity costs include?
- Private opportunity cost
- External opportunity cost
Social costs
Social costs = private cost + external cost
Social cost is the harm done to the public with negative externalities
How do negative externalities affect the market?
Markets fail because prices do not cover all opportunity costs
When there are positive externalities, benefits include?
- Private benefit
- External benefit
Social benefit
Social benefit = private benefit + external benefit
Social benefit is the good done to the public with positive externalities
How do positive externalities affect the market?
Markets fail because prices are too high
Why do externalities cause market failure?
Because of lack of property rights
Efficient pollution
A term that describes the balance of the benefits and opportunity costs that come with reducing pollution
Why will having a certain level of pollution be efficient?
As more things are done to reduce pollution, eventually, the additional costs will be more than the additional benefits
Recipe for efficiency
Choose the quantity of output a marginal social benefit = marginal social cost
Marginal social cost (MSC)
MSC = marginal private cost + marginal external cost
Two government policies to reduce negative externalities
- Social property rights
- Environmental policies
Social property rights
Makes polluting illegal
Two environmental policies
- Carbon tax
- Cap-and-trade system
Carbon tax
Emission tax
This forces the business to pay the cost of producing negative externalities
Cap-and-trade system
The amount of pollution a certain business can do is limited by issuing emission permits
Emission permits can be traded within businesses
Public goods
Government-produced goods that are available to everyone
Free-rider problem
This is when businesses don’t produce enough products with positive externalities
Marginal social benefit (MSB)
MSB = marginal private benefit + marginal external benefit
Two government policies to increase positive externalities
- Subsidies
- Public provision
Subsidies
Payments made to businesses for providing positive externalities
Public provision
Government-produced services with positive externalities
How are public provisions funded?
Using tax
