chapter 9 Flashcards
Pecuniary externality
When a market exchange affects other people through market prices causing (negative externality)
do not create mark inefficiencies
pecuniary externality Example
buying an iphone market demand will shift rightward, increasing price.
internalizing the externality
when agent account for the full cost and benefits of their actions
positive externalities
free markets produce and consume too little
Coase Theorem
States that private bargaining will result in an efficient allocation of resources
not necessary to solve externality problems - private bargaining can do the job
number of agents on each side of the bargaining table matters
ex: the plant has the right to pollute or the 100,000 fishermen have the right to clean water, end result will be the efficient amount if water quality.
property right
gives someone ownership of a property or resources
transaction costs
are the costs of making an economic exchange; legal fees and your time
negotiate economically is critically important
private solution
Command and control - direct regulation
Market based policies - provide incentives
What if private solutions do not work?
solutions take the form of rules that restrict production in some form, taxation, or requiring permits for production.
government solutions are externalities
command-and-control regulation
either directly restricts the levels of production or mandates the use of certain technologies.
Q market > Q optimal
market-based regulatory approach
internalizes externalities by harnessing the power of market forces
deals with externalities with corrective taxes and subsidies
another alternative than command-and-control regulation
EX: the method to fix issue is left to the agent who caused the issue
Pigouvian Subsidy or pigouvian tax
Subsidy necessary to make an economic agent who makes positive externalities increase consumption to the socially optimal level
E.x. - Scholarships
pigouvian tax or a corrective tax
Tax necessary to incentivize a firm to produce negative externalities, that socially optimal level of output
Also work on individuals
Non Excludable Goods
Can be consumed, even if they are not paid for
public goods
Ex: Water
Excludable Goods
Must be paid for in order to consume them
private good
Ex: Technically Netflix
Nonrival Good
Goods that more than one person can consume at a time
public good
Ex: Netflix
Rival Good
Goods that only one person can consume at a time.
private good
Ex: An Apple
public good
non rival and non excludable in consumption
ex: national defense
club good
non rival but excludable
ex: cable tv, wifi
private good
excludable and rival
ex: clothes, food
common pool resource good
are a class of goods that are rival and non excludable ex: fish, water, natural forest
Free Rider Problem
When an individual does not pay for a good because it is non-excludable
private provision of public goods
takes place when private citizens make contributions to the production or maintenance of public goods
ALSO
Money may not go to the areas of most critical need
Too Variable
When economy is downturn (needed the most), giving decreases
Tragedy of the commons
When common pool resources are overused
Solutions to tragedy of the commons:
Private ownership (defined by the government)
Government regulation (EX: fishing limits)
Tax on use
