Externalities Flashcards
Types of externalities
- Technological
- Pecuniary
- Symmetric
- Asymmetric
- Transferable
- Depletable
- Non- depletable
- Transnational
- Stock vs. Flow
Technological externality
An innovation that creates a change in welfare (external effect is through real effect on consumption or production)
Pecuniary externality
When an actors action indirectly affects the market, but there is no change to welfare because the benefits and costs are just transfered within the market. (External effect is through market price)
Symmetric externality
The actor causing the externality is the one who experiences full effect of externality
Asymmetric externality
The actor causing the externality is different from the actor who experiences the externality
Transferable externality
A firm deliberately transfers the effects of an externality in place or time
Depletable externality
One actors experience of the externality deplets how much another feels the externality
Non depletable externality
When one actors experience of the externality does not deplete another’s experience of it
Transnational externality
One country’s outcome depends on the action of other countries
Stock vs Flow externality
Stock- cumulative effect over time.
Flow- rate of effect at a given point in time
Missing market
Value of a good is not captured in the market or undervalued
Incomplete market
Prices don’t account for all of the cost of the good.
Socially optimum level of externality
MC= MB
Approaches to addressing externality
- Private
- Command & control
- Incentives
- Liability laws
Private solutions to externality
- Intrinsic motivation
- NGOs
- Self interest of parties
- Voluntary contracts
Social cost
Private costs + externality
Coase theorem
Bargaining can lead to an optimal outcome (internalized externalities) by actors themselves if property rights are clearly defined & negotiation is feasible.
Types of standards for direct regulation
- Technology
- Process
- Performance
Equi-marginal principle
Maximum total utility is achieved by allocating resources so that the marginal utility per unit of expenditure is equal
Types of market based incentives
- Pigovian tax
- Subsidies
- Property rights.
