Chapter 13 Flashcards
Externalities
Define externality.
Spillover effects on third parties.
What’s the difference between external costs and external benefits?
Cost- Negative spillover effect of consumption/production
Benefits- Positive effect of consumption/production
Give examples of external costs.
Noise/air pollution, overcrowding, traffic.
Give examples of external benefits.
Education: better jobs, more efficient workers.
Health care: less pain = work more to pay taxes.
Social costs vs. External costs?
External: Cost of economic activity on third parties.
Social: Cost of economic activity on third parties + firm
Social benefit vs External benefit?
Social: Benefits of economic activity on third parties + firm.
External: Benefits of economic activity on third parties.
Social cost= ?
Social benefit= ?
Private cost (e.g cost of spending)+ External cost (pollution)
Private benefit (investment return) + External benefit (creation of jobs) .
How can governments reduce negative externalities and increase positive externalities?
Taxation/subsidies
Fines
Gov regulation
Pollution permits
Why do governments place taxes on some businesses?
Increase their costs of production so their prices go up. The demand (for products w neg externalities) will decrease and so pollution will also decrease.
Why do governments give subsidies to some businesses?
To reduce their costs of production, so their prices decrease and demand increases. Or as incentives to reduce external costs e.g build a power plant.
Why do governments place fines on some businesses?
If they produce an extreme amount of external costs, they’ll be fined. This discourages businesses from creating external costs.
Why do governments place pollution permits on some businesses?
Pollution permits- Only allows a business to discharge a certain amount of pollution into the environment (tradable). Creates an incentive to have advanced technology.
