eco105: 11-12 Flashcards
Negative externalities
costs to society from your private choice that affect others, but that you do not pay
Social costs =
private (opportunity costs) + external (opportunity) costs
Positive externalities
benefits to society from your private choice that affect others, but that others do not pay for
Social benefits =
private benefits + external benefits
Free riders
people who consume products or services without paying
Why do businesses produce too few products and services with positive externalities
Because free riders do not have incentives to pay us for the external benefits
When do externalities occur?
when clear property rights are missing
What happens without property rights
you have no incentive to produce for exchange because customers could take your work for free
How is the tragedy of the commons a negative externality problem
Adding your cow/sheep to the commons to eat the grass makes it harder for other animals to find grass to eat
Tragedy of the Commons
The tragedy of the commons was the overuse and depletion of the resource, the destruction of a common good
The grassland was overused and the grass would not regrow
How does the invisible hand help markets
helps markets coordinate private smart choices to be smart choices for society as a whole when prices adjust to reflect all costs and all benefits
What do economists think about pollution?
some level of pollution is “efficient”; there is a smart choice that balances the costs of a lower standard of living against the benefits of lower pollution
Efficient pollution
balances the additional environmental benefits of lower pollution with the additional opportunity costs of reduced living standards
Marginal social cost
marginal private cost (MC) plus marginal external cost
The rule for an efficient combination of output and pollution
Choose the quantity of output where marginal social cost = marginal social benefit (MSC = MSB)
What happens to social costs when there are negative externalities
- social costs are greater than private costs
- marginal social cost = marginal private cost directly paid by producers (MC) + marginal external cost imposed on others
Marginal social benefit
marginal private benefit (MB) plus marginal external benefit
What happens to social benefits when there are positive externalities
- Social benefits are greater than private benefits
- marginal social benefit = marginal private benefit directly received by consumers + marginal external benefit enjoyed by others
Market outcome
the intersection of the marginal private benefit and marginal private cost curves
Smart social choice
intersection of the marginal social benefit and marginal social cost curves
The rule for a smart social choice
choose the quantity of output where marginal social cost = marginal social benefit
How do governments support the invisible hand
set the environmental rules of the game in a way that aligns smart private choices with smart social choices → Create property rights (pollution laws)
two policies that force polluters to pay the cost of preventing or cleaning up the external damage they cause to others
Carbon Taxes and Cap-and-Trade System
Carbon tax
emissions tax on carbon-based fossil fuels
Emissions tax
tax to pay for external costs or emissions
A smart carbon tax is set at
an amount equal to the marginal external cost of the damage associated with the product
Internalize the externality
transform external costs into costs the producer must pay to the government
Cap-and-trade system
system that limits the quantity of emissions businesses can release into environment. (e.g businesses must have permits to pollute)
common objection to the cap-and-trade system
it allows businesses to “buy a license to pollute”
How does the carbon tax work
anyone using energy pays the tax up front
A carbon tax makes the cost of a negative externality directly obvious to consumers and businesses
How does a cap-and-trade system work
businesses pay initially for emissions permits, but consumers pay eventually as the additional cost is passed on in higher prices for products and services
The cost of emissions permits in a cap-and-trade system are far less obvious to the final consumer
