Chapter 17: Externalities and the Environment Flashcards
Private cost
The cost that is borne by the producer of a good or service.
Marginal cost
The cost of producing an additional unit of a good or service.
Marginal private cost
The cost of producing an additional unit of a good or service that is borne by its producer.
External cost
A cost of producing a good or service that is not borne by the producer but borne by other people.
Marginal external cost
The cost of producing an additional unit of a good or service that falls on people other than the producer.
Marginal social cost
The marginal cost incurred by the producer and by everyone else on whom the cost falls - by society.
MSC (Marginal social cost) =
Marginal cost + marginal external cost
Three approaches to fix the inefficiency that arises from an external cost
- Establish property rights
- Mandate clean technology
- Tax or price pollution
Property rights
Legally established titles to the ownership, use and disposal of factors of production and goods and services that are enforceable in the courts.
Abatement technology
A production technology that reduces or prevents pollution.
Coase theorem
The proposition that if property rights exist and the transactions cost of enforcing them are low, the private transactions are efficient and it doesn’t matter who has the property rights.
Transactions costs
The opportunity costs of conducting a transaction.
Two main methods governments use to confront polluters:
- Taxes
- Cap-and-trade
Pigovian taxes
Taxes used as an incentive for producers to cut back the pollution they create.
Tragedy of the commons
The overuse of a common resource that arises when its users have no incentive to conserve it and use it sustainably and efficiently.
Two problems that give rise to tragedy of the commons
- Unsustainable use of a common resource
- Inefficient use of a common resource
Efficient Equilibrium
Use of the resource that makes the marginal social benefit from the resource equal to the marginal social cost of using it.
Three main methods used to achieve the efficient use of a common resource
- Property rights
- Production quotas
- Individual trasferrable quotas
Production quota
An upper limit to the quantity of a good that may be produced in a specified period.
Individual transferrable quota
A production limit that is assigned to an individual who is the free to transfer the quota to someone else.
