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Public Finance > Externalities > Flashcards

Externalities Flashcards

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1
Q

What is the only reason for the government to get involved?

A

Market failure

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2
Q

What is market failure?

A

When free market does not produce the most efficient economic outcomes.

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3
Q

What is an externality?

A

When someone is affected economically by the transactions of other market participants.

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4
Q

What is general equilibrium?

A

When we are thinking of all the other parties in the economy.

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5
Q

Are general equilibrium events market failure?

A

No

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6
Q

What is negative production externality? Provide example.

A

A steel plant which is damaging children in the river with its pollution.

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7
Q

How the company wants to set its costs?

A

MC = MR

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8
Q

What is PMC?

A

Private Marginal Cost - cost of producing one more good for the firm.

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9
Q

What is MD?

A

Marginal Damage - cost of the negative externality - how much more external damage does producing one additional good cause?

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10
Q

What is SMC?

A

Social Marginal Cost = PMC + MD. Society = everyone (producers + consumers)

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11
Q

What is SMC without externalities?

A

PMC

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12
Q

What SMC is of producing BMW car?

A

PMC - labor, materials, MD - pollution, CO2 costs and you have to add them up.

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13
Q

What we can think of the demand curve?

A

Social marginal benefit

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14
Q

What we can think of supply curve?

A

Private marginal cost

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15
Q

How to include externality on the graph?

A

We add MD to supply curve (PMC) and we get SMC social marginal cost.

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16
Q

What is deadweight loss?

A

Inefficiency - value that nobody gets, which is going away and being wasted.

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17
Q

What is negative consumption externality?

A

When other people are harmed by your consumption.

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18
Q

PMB when it comes to consumpption theory is?

A

Your MB

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19
Q

SMB when it comes to consumption theory is?

A

Your MB minus any costs you impose on others (but take it on the demand curve not supply)

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20
Q

What is positive production externality? Provide example.

A

Somebody could be helped in external way from your prodcution. For example beehives have positive impact on agricultural output.

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21
Q

What is positive consumption externality?

A

Somebody is helped in an external way from your consumption. For example, a nice private garden which makes people feel happy as they walk by.

22
Q

In a free market PMB and PMC is?

A

Equal. PMC = PMB in a free market

23
Q

What is Samuelson rule?

A

Social optimum at SMB = SMC

24
Q

Negative production externalities lead to?

A

Overproduction

25
Q

Positive production externalities lead to?

A

Underproduction

26
Q

Negative consumption externalities lead to?

A

Overconsumption

27
Q

Positive consumption externalities lead to?

A

Underconsumption

28
Q

What externalities are associated with the bar?

A

Noise in the neighbourhood, drunk people are more likely to commit violence.

29
Q

What was key question raised by Ronald Coase?

A

Are externalities really outside the market mechanism? Is tough governmental regulation is always the best solution?

30
Q

What solution should based on wanting to reduce externalities?

A

What is the most efficient - we want to internalize the externality.

31
Q

What is internalizing the externality?

A

The cost of externality should be paid by the firm or consumer who produce the externality.

32
Q

Provide example on Coase Theorem.

A

Best solution is the cheapest and most efficient. Give property rights to somebody.

33
Q

What is Coase theorem part 1?

A

When there are well-defined property rights and costless bargaining, then negotiations can bring about socially optimal market quantity.

34
Q

What is Coase theorem part 2?

A

The efficient quantity for a good producing an externality does not depend on which party is assigned the property rights, as long as someone is assigned those rights (we will always end up at socially economic equilibrium).

35
Q

What is the assignment problem when it comes to Coasian theorem?

A

When externality is affecting a lot of people (like air pollution) assigning property rights is difficult.

36
Q

Coasian solutions work better at … level.

A

local

37
Q

What is the holdout problem when it comes to Coasian solution?

A

A holdout can wield disproportionate power over his/her neighbours. Therefore, there is a problem with bargaining because someone will hold on to get the best deal and that makes the negotiation break down.

38
Q

What is the free rider problem when it comes to Coasian solution?

A

You can simply walk out of it, like US walked out of the Kyoto Protocol.

39
Q

What is transaction costs and negotiating problems when it comes to Coasian solution?

A

Negotiations can be time consuming, not worth the effort.

40
Q

What are public solutions for externalities popular in America?

A

Incentive policy: Price policy - corrective tax (Pigouvian) or subsidy equal to marginal damage per unit

41
Q

What are public solutions for externalities popular in Europe?

A

Commanding control: Quantity regulation

42
Q

Is Pigouvian tax and quantity regulation equally effective?

A

Yes, they should end up the same, but in reality they don’t.

43
Q

Why using quantity regulation might be easier for policymakers?

A

If you are trying to reduce pollution, you just give the amount of pollution to the companies, but if you want to tax it, you don’t know if the company is going to reduce the amount.

44
Q

The incentive system is better when we have what kind of firms? Why?

A

Heterogeneous, because we get combined social optimum.

45
Q

When dealing with heterogeneous production costs what policies are efficient?

A

Pigouvian tax and quantity regulation with tradable permits.

46
Q

When MD curve is flat which policy is better?

A

Taxes

47
Q

When MD curve is steep which policy is better?

A

Tradable permits

48
Q

When we are talking about global warming (pollution) - flat MD curve - which incentive is better? Why?

A

Tax is much more preferrable than mandate. Because we just assume what MC of the firms are and if we made a mistake, we end up with huge deadweight loss (the cost is much higher than the benefits). Firms know their MC, therefore it is more accurate to use a tax.

49
Q

When we are talking about nuclear leakage - steep MD curve - which policy is better?

A

You want to use commanding controls, we want to tell nuclear companies how much to pollute.

50
Q

What author means by internalities?

A

Putting an externality on your future self.

51
Q

If assuming that smoking is an externality, how can people internalize the externality?

A

By suing smoking companies.

52
Q
A

Public Finance (5 decks)

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