Chapter 5 Flashcards
Externality
A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
What is the effect of externalities
Interfere with economic efficiency
Private costs vs social costs
Private costs are borne by the producers
Social costs include private costs + any external cots
Private vs social benefit
Private benefits are received by the consumers
Soical benefits include private benefit + any benefits to others.
When does a negative externality occur?
When total cost > private cost
When does a positive externality occur
When total benefit > private benefit
What is the effect of a negative externality
AN over production of a good or service at market equilibrium
Effect of a positive externality
An under production of a good service at market equilibrium
Market failure
A situation in which the market fails to produce the efficient level of output
Coase theorem
Private parties can solve the externality problem through private bargaining provided:
- Property rights are assigned and enforceable
- Transactions costs are low
- Parties have full information about the costs and benefits involved
Property rights
The rights to the exclusive use of property, including the right to buy or sell it.
Transaction costs
The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.
How do governments solve a negative externality?
By imposing a tax equal to the cost of the pollution
How does the government solve positive externalities
By introducing subsidies
Rivalry
One person’s consumption of a unit of a good means non one else can consume it
