Chapter 18 ( Externalities, Open-Accesss, and Public Goods) Flashcards
When does an externality occur?
An externality occurs if someone’s consumption or production activities hurt or help others outside a market
Why would a firm pollute excessively?
Because the firm has no financial incentive to reduce its level of pollution and it would be costly to do so, the firm pollutes excessively.
What are externalities caused by?
Externalities are caused by a lack of clearly defined property rights.
Externalities are…
By-products of consumption and production may benefit or harm other people
The inefficiency of competition with externalities
A competitive market produces too much of a harmful externality, but that overproduction can be prevented through taxation or regulation.
Market Structure and Externalities
Whit a harmful externality, a noncompetitive market equilibrium may be closer to the socially optimal level than a competitive equilibrium.
Allocating Property Rights to Reduce Externalities
Clearly assigning property rights allows exchanges that reduce or eliminate externality problems
Open-Access Common Property
People overexploit resources when property rights are not clearly defined
Public Goods
Private markets supply too few public goods, and governments have difficulty determining their optimal levels
Externalities (def.)
The direct effect of the actions of a person or firm on another person’s wellbeing or a firm’s production capability rather than an indirect effect through changes in price
What is the market supply curve when analyzing the welfare effects of pollution in a competitive?
The market supply curve is the aggregate private marginal cost curve, MCp, which is the horizontal sum of the private marginal cost curves of each of the plants/firms
Private Cost
The cost of production only, not including externalities
Social Cost
The private cost plus the cost of the harms from externalities
Welfare is higher at the social optimum than at the competitive equilibrium because…
the gain from reducing pollution from the competitive to the socially optimal level more than offsets the loss to consumers and producers of the paper
The government may impose costs on polluters by …
taxing their output or the amount of pollution produced. (Similarly, a law could make a polluter liable for damages in a court.)
