Chapter 11 | Externalities, Carbon Taxes, Free Riders and Public Goods Flashcards

1
Q

Handcuffing the Invisible Hand: Market Failure with Externalities

A

When externalities exist, prices don’t reflect all social costs and benefits; markets fail to coordinate private smart choices with social smart choices.

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2
Q

Negative externalities (external costs)

A

costs to society from your private choice that affect others, but that you do not pay.

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3
Q

Positive externalities (external benefits)

A

benefits to society from your private choice that affect others, but that others do not pay you for.

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4
Q

Externalities occur when clear property rights are missing.

A

– Tragedy of the commons — the overuse and depletion of a resource that no one can be excluded from because of missing property rights.
– Free riders — those who consume products or services without paying.

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5
Q

When externalities exist, prices don’t reflect all social costs and benefits, and markets fail to produce efficient outcomes. Instead markets produce:

A

– too many products and services with negative externalities (second-hand smoke, pollution, traffic jams).
– too few products and services with positive externalities (vaccinations, education).

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6
Q

Why Radical Environmentalists Dislike Economists: Efficient Pollution

A

For an efficient market outcome when there are negative externalities, choose the quantity of output where marginal social cost equals marginal social benefit.

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7
Q

Efficient pollution” balances the additional environmental benefits of lower pollution with the additional opportunity costs of reduced living standards.

A

– The socially desirable amount of pollution is not zero; at some point the additional opportunity costs of reducing pollution are greater than the additional benefits of lower pollution.

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8
Q

The market quantity and price are determined at the intersection of the marginal private benefit and marginal private cost curves.

A

The market quantity and price are determined at the intersection of the marginal private benefit and marginal private cost curves.

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9
Q

For any product or service that generates an externality, the rule for a smart choice is: Choose the quantity of output where marginal social cost equals marginal social benefit.

A

– Marginal social cost
– Marginal external cost
- Marginal social benefit
– Marginal external benefit

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10
Q

– Marginal social cost

A

(MSC) = marginal private cost (MC) plus marginal external cost

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11
Q

– Marginal external cost

A

= price of preventing or cleaning up damage to others external to the original activity

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12
Q

– Marginal social benefit (MSB)

A

(MSB) = marginal private benefit (MB) plus marginal external benefit

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13
Q

Marginal external benefit

A

= price of the value or savings to others external to the original activity

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14
Q

Markets overproduce products and services with negative externalities; the price is too low because it does not incorporate external costs.

A

Markets overproduce products and services with negative externalities; the price is too low because it does not incorporate external costs.

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15
Q

Liberating the Invisible Hand: Policies to Internalize the Externality

A

If polluters are forced by government to pay the marginal external costs of their pollution, this internalizes the externalities/costs into private choices, creating smart social choices.

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16
Q

Without property rights to the environment, businesses have incentives to save money and improve profits by ignoring external costs like pollution and global warming.

A

Without property rights to the environment, businesses have incentives to save money and improve profits by ignoring external costs like pollution and global warming.

17
Q

Governments can remedy market failures from externalities by creating social property rights to the environment, making polluting illegal, and penalizing polluters.

A

Governments can remedy market failures from externalities by creating social property rights to the environment, making polluting illegal, and penalizing polluters.

18
Q

Emissions tax

A

tax to pay for external costs of emissions
- Carbon Tax
- Smart Carbon Tax

19
Q

Carbon tax

A

emissions tax on carbon-based fossil fuels

20
Q

Smart carbon tax

A

= marginal external cost of damage from emissions

21
Q

Cap-and-trade system

A

— limits the quantities of emissions businesses can release into environment.

– Government auctions off pollution permits to the highest bidders.
– Total quantity of emissions allowed by permits = emissions target.
– Businesses buy and sell emissions permits. Permit price becomes a private cost to business reflecting the marginal external cost of pollution.

22
Q

Internalize the externality

A

— transform external costs into costs the producer must pay to the government.

23
Q

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.

A

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.

24
Q

Carbon taxes and cap-and-trade systems are smart policies for efficient pollution, but may be inequitable in hurting lower-income consumers most.

A

Carbon taxes and cap-and-trade systems are smart policies for efficient pollution, but may be inequitable in hurting lower-income consumers most.

25
Q

With positive externalities, buyers and sellers are not paid for the external benefits their exchange creates. The market-clearing price is too high for buyers to be willing to buy the socially best quantity of output, and too low for sellers to be willing to supply.

A

With positive externalities, buyers and sellers are not paid for the external benefits their exchange creates. The market-clearing price is too high for buyers to be willing to buy the socially best quantity of output, and too low for sellers to be willing to supply.

26
Q

Public goods

A

— provide external benefits consumed simultaneously by everyone; no one can be excluded.

– Public goods like lighthouses and national defence are extreme examples of positive externalities.

27
Q

Free-rider problem

A

— markets underproduce products and services with positive externalities.

– Price charged to buyers is too high.
– Price received by sellers is too low.

28
Q

The smart social quantity of output with positive externalities is at the intersection of the marginal social benefit and marginal social cost curves.

A

– With positive externalities, no single price can coordinate smart individual choices and smart social choices.
– The market-clearing price is too high for buyers to be willing to buy and too low for sellers to be willing to supply.

29
Q

Why Your Tuition Is Cheap (Really!): Subsidies for the Public Good

A

When there are positive externalities, government subsidies can get everyone to voluntarily choose the socially best quantity of output where marginal social benefit equals marginal social cost.

30
Q

Subsidy

A

— payment to those who create positive externalities.

– Smart subsidy = marginal external benefit of savings to others associated with an activity.
– Subsidies remove the disconnect between prices for buyers and sellers caused by positive externalities, leading individuals and businesses to voluntarily choose the quantity of output best for society.
– Subsidies to either suppliers or demanders can achieve an efficient social outcome.

31
Q

Public provision

A

— government provision of products or services with positive externalities, financed by tax revenue.