externalities? Flashcards
what are externalities?
actions by either a producer to a consumer that affect other producers or consumers but are not accounted for in the market price
what are the 2 kinds of externalities?
negative
positive
what is a negative externalities?
when the action of one party causes negative spillover costs on another party
what is a positive externality?
when the action of one party benefits another party
does the market price of goods reflect the social cost or value in the market price?
no it does not, this means firms may produce too much or to little causing the market to outcome to be inefficient
when externalities are present how does that impact the market outcome?
it is now inefficient
when there are negative externalities present, how does that impact market outcome?
the free market will produce and consume to much
when there are positive externalities present, how does that impact market outcome?
the free market will produce and consume to little
what are 3 kinds of market failures?
monopolies
externalities
public goods
how do market failures impact the market?
they cause the market to be inefficient due to the deadweight loss it creates
what costs do negative externalities cause?
it causes a marginal external cost (MEC)
what is marginal external cost (MEC)?
increase in cost imposed externally as one or more firms increase by one unit
what is marginal social cost?
the sum of the marginal cost of production and the marginal external cost
how does demand cost equilibrium change when negative externalities are present?
the equilibrium will shift from the demand curve, price and the marginal cost curve to the point where equilibrium between demand, cost and marginal social cost (slide 6 externalities)
what is an example of negative externalities?
I am writing an exam and there is someone in the next room playing music, they are maximizing their utility but this causes a negative externality for us writing the exam
what does negative externalities create?
deadweight loss
why do negative externalities create deadweight loss?
because the new marginal social cost curve increases price and reduces quantity produced, this causes a missed dead weight loss by reducing the transactions that took place at the previous price
what needs to be true for max efficiency in the market?
MC=MR
is marginal cost equal to marginal social cost?
no its not equal marginal social cost is higher
when positive externalities are present, what do they create?
marginal external benefit (MEB)
what is marginal external benefit (MEB)?
increased benefit that accrues to other parties as a firm increases output by one unit
what is marginal social benefit?
the sum of the marginal private benefit plus the marginal external benefit
how does the positive externalities impact the equilibrium between demand and marginal cost?
it causes the demand for the product to increase due to the marginal social benefit is high than demand (marginal benefits) causing there to be more of the product demanded
what is an example of a positive externality?
when you decide to go to school to get a good job to maximize your utility, this will cause a spillover and increase human capital and benefits society
what is an example of education serving as a positive externality?
higher education causes more informed voters
less crime
higher productivity
how do positive externalities impact market output?
it produces a smaller quantity than is socially desirably, because the positive externalities create a higher demand for the good
how can you correct externalities?
by internalizing the externality
what is internalizing the externality?
making the economic agents account for the full coats and benefits of their actions. incentives are altered in a way in which the external effects of their actions are accounted for
what are the 4 ways of internalizing the externality?
emissions standards
emissions fees - taxes/subsidies
transferable enmissions permits
the coase theorem
are externalities efficient?
no they are inefficient
how is an externality negative?
when they produce a high social cost
how can you tell what the efficient level to produce when taking in to account of marginal social cost and the marginal cost of abatement (MCA)?
the point where MEC and MCA cross
(slide 5 externalities 2)
is it effective to produce the amount where emissions are 0?
no it is not because we need production
when reducing emissions from 26-24 is it expensive to move from 26-24?
no it is not but it is expensive when making drastic changes
what does MEC stand for?
marginal external cost
what does MCA stand for?
marginal cost of abatement
what is an emissions standard?
a legal limit on the amount of pollutants that a firm can emit
how would an emissions standard work?
it would set the emissions standard at the equilibrium/ optimal level of emissions for society
how does an emissions standard help correct a market failure?
the standard ensures that the firm produces efficiently. the firm meets the standard by installing pollution-abatement equipment. the firms will only enter the industry if the price of the product is greater than the average cost of production plus abatement
what is an emission fee?
a charge added on a firms emission
how does an emission fee help correct a market failure?
there is a fee at the price that is in line with the optimal level of pollution so people pollute at the optimal level
what are taxes?
a tax designed to induce economic agents to take account of the negative externalities
how will taxes/subsidies correct a market failure?
taxes would increase the cost and shifts the supply curve to the left when taking in to account to the marginal social cost
subsidies would shift the supply curve to the right causing the supply to increase
(refer to slide 8 externalities 2)
what are tradable emissions permits?
system of marketable permits, allocated among firms, specifying the maximum level of emissions that can be generated
how do tradable permits help correct a market failure?
each permit specifies the number of units of emissions that a firm is allowed to produce, the permits are marketable and can be bought and sold, the higher polluters buy the permits from the lower polluters. in equilibrium the price of a permit equals the marginal cost of abatement for all firms (slide 10 externalities 2)
what is the argument against tradable emissions permits?
the tradable permit market is not equitable
what is the case theorem?
the principle that private parties can bargain without cost and to their mutual advantage, the resulting outcome will be efficient regardless of how property rights are specified
what are the 3 conditions that must be present for the case theorem to work?
transaction costs of negotiating are low or zero (legal fees and coordination costs)
well defined property rights
complete information
what is an example of case theorm?
if your room mate is a musician and you are a professor, you need silence he need noise to work. but you guys can negotiate if it is free to negotiate, property right are defined and complete information. they can figure out a position where everyone benefits. if the professor makes 100 dollars he can pay the musician 50 to rent a space, everyone benefits, the musician can practice and the professor can work in silence
