Chapter 3 Flashcards
Corrective Subsidy
A payment made by the government to either buyers or sellers of a good
So that the price paid by the consumers is reduced
Corrective Tax
Tax that adjusts the marginal private cost of a good or service in order to internalize the externality
It’s designed to internalize a negative externality by making sellers of the product pay a fee equal to the marginal external costs per unit of output sold.
Externalities
Cost or benefit of market transactions not reflected in prices
General Theory of Second Best
When two opposing factors contribute to efficiency losses, they can offset one another’s distortions
Internalization of an Externality
Occurs when:
- the marginal private benefit/cost of goods and services are adjusted
- this is so users consider the actual marginal social benefit or cost of their decisions.
Marginal External Benefit
MEB
The benefit of additional output accruing to parties
other than buyers or sellers of the good.
Marginal External Cost
MEC
The extra cost to third parties resulting from production of another unit of a good/service
Marginal Private Benefit
MPB
The marginal benefit that consumers base their decisions on
Marginal Private Cost
MPC
The marginal cost that producers base their decisions on
Negative Externalities
Also called external costs
Costs to third parties other than the buyers or the sellers of an item not reflected in the market price.
Pollution Abatement
Reduced pollution caused from reduced emissions
Pollution Rights
Transferable permits to emit a certain amount of particular wastes into the atmosphere or water per year
Positive Externalities
Benefits to third parties other than the buyers or the sellers of a good or service not reflected in prices.
Small-Number Externalities
The kinds of externalities for which the Coase theorem is relevant
-governments can internalize externalities when transactions costs of bargaining are zero
Transactions Costs
The time, effort, and cash outlays involved in locating someone to trade with, negotiating terms of trade, drawing contracts, and assuming risks associated with the contracts.
