Chapter 11 (EXTERNALITIES)

Question 1

Negative externalities (external costs)

Answer 1

Costs to society from your private choice that affect others but that you do not pay

too many products and services w negative externalities examples (second hand smoke, pollution, traffic jams)

• a way to NOT correct a negative externality is making social marginal cost higher than the private marginal costs

MPC<MSC & MPB=MSB

Question 2

Positive externalities (external benefits)

Answer 2

Benefits to society from your private choice that affect others but that others do not pay you for

Too few products and services with positive externalities (vaccinations and education)

In the absence of government markets will fail when there are positive externalities

MPC=MSC & MPB<MSB

Question 3

Tragedy of commons

Answer 3

The over use and depletion of a resource that no one can be excluded from because of missing property rights… that’s when externalities occur

Question 4

Free riders

Answer 4

Those who consume products or services without paying

Question 5

Efficient pollution

Answer 5

Balances the additional environmental benefits of lower pollution with the additional opportunity costs of reducing living standards

• the socially desirable amount of pollution IS NOT ZERO, the additional opportunity costs of reducing pollution are GREATER than the additional benefits of lower pollution
• the market quantity and price are determined at the intersection of the MPB (marginal private benefit) and MPC (marginal private cost) curves

Question 6

Rule for smart choice for any product of service that generates an externality

Answer 6

Choose the quantity of output where MSC (marginal social cost) EQUAL MSB (marginal social benefit)

Question 7

MSC

Answer 7

Marginal social cost = marginal private benefit + marginal external benefit

Question 8

MSB

Answer 8

Marginal external benefit = price of the value or savings to other external to the original activity

Question 9

Social costs

Answer 9

= private costs + external costs
- when social costs> private costs: negative externalities and overproduction
- when social costs<private costs: positive externalities and underproduction

Question 10

Marginal private costs

Answer 10

The costs experienced by the individual or business involved in the original activity

Question 11

Emissions Tax

Answer 11

Tax to pay for external costs of emissions

Question 12

Carbon tax

Answer 12

• emissions tax on carbon based fossil fuels

Question 13

Smart carbon tax

Answer 13

= marginal external cost of damage from emissions

Question 14

Cap and trade system

Answer 14

• limits the quantities of emissions businesses can release into the environment
• common objection is it givers businesses the RIGHT to pollute
• total quantity of emissions allowed by permits = emissions target
• businesses buy and sell emissions permits and permit price becomes a private cost to business reflecting the marginal external cost of pollution

Question 15

Internalize the externality

Answer 15

Transform external costs the producer must pay to the government or to impost taxes on the company
- carbon taxes and emissions permits give pollution a price reflecting marginal external cost of damage done, so smart individual and business choices become smart social choices
- carbon taxes and cap and trade systems are smart politics for efficient pollution but may be inequitable in hurting lower income consumers most

Question 16

Public goods

Answer 16

Provide external benefits consume simultaneously by everyone so no one can be excluded
- public goods like lighthouses and national defense are extreme examples of positive externalities

Question 17

Free rider problem

Answer 17

Markets underproduce products and services with positive externalities
- price charged to buyers is too high
- price received by sellers is too low

Question 18

Subsidy

Answer 18

Payment to those who CREATE positive externalities
- smart subsidy = marginal external benefit of savings to other associated with an activity
- remove the disconnect between prices for payers and sellers causées by positive externalities leading individuals and business to voluntarily choose the quantity of output best for society
- subsidies to either suppliers or demanders can achieve an efficient social outcome

Question 19

Public provision

Answer 19

• gov provision of products or services with positive externalities financed by tax revenue

Public provisions fund public goods from income tax generated from an individual’s income