Chapter 7 - Externalities

Question 1

What is….

• An externaility?
• a negative externalitiy?
• a positive externality?

Answer 1

• an externality is an uncomoensated impact of one person´s actions on the well-being of a bystander
• a negative externality the the costs imposed on a third party of a decision
• a positive externality are the benefits to a third party of a decision

Question 2

What is Coase theorem?

Answer 2

• states that private bargaining (privates handeln) will result in an efficient allocation of resources, as long as there are no (little) costs involved when bargaining

Question 3

What if private solutions do not work?

1.
2.

Answer 3

Government solutions are:

• command-and-control - direct regulation
• market-based-policies - provide incentives

Question 4

What is the Pigouvian Tax?

Answer 4

the tax necessary to incentivize a firm to produce the socially optimal level of output