Externalities And Market Failure Flashcards
What is internalising an externality
Altering incentives so that people take account of the external effects of their actions
Externality
Cost or benefit of one persons decision on the well-being of a third party which the decision maker does not take into account when making the decision
4 types of private solutions to externalities
Social norms of moral behaviour (advertising)
Charities (eg Greenpeace and environment)
Self interest
Social contracts
What is the coarse theorem
Proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
Why do private solutions not always work
Transaction costs
Bargaining problems
Coordinating interested parties
Asymmetric info and the assumption of rational behaviour
Positional externality
When the payoff to one individual is dependent on their relative performance to others
Positional arms races
Individuals invest in a series of measures designed to gain them an advantage but which simply offset each other
Public policies for externalities
Regulation
Pigovian taxes and subsidies (tax enacted to correct the effects of a negative externality)
Traceable pollution permits
Pigovian tax
Tax to correct effects of negative externality
Marginal abatement cost
Cost expressed in terms of the last unit of pollution not emitted (abated)
Public/private policies for externalities
Property rights
Control of positional arms races
What are property rights
An exclusive right of an individual, group or organisation to determine how a resource is used
Difficulties in establishing property rights
How do we apportion rights to air, seas, rivers, land etc
Gov failure
Situation where political power and incentives distort decision making so that decisions are made which conflict with economic efficiency
Public interest
Making decisions based on a principle where the max benefit is gained by the largest number of people at min cost
Public choice theory
Analysis of gov behaviour and the behaviour of individuals who intersct with gov
Rational ignorance effect
Tendency of a voter to not seek out info to make an informed choice in elections
Special interest effect
Where benefits to a minority special-interest group are outweighed by the costs imposed on the majority
Logrolling
The agreement between politicians to exchange support on an issue
Rent seeking
Where individuals or groups take actions to redirect resources to generate income (rents) for the,selves or the group
Cronyism
Where the allocation of resources in the market is determined in part by political decision making and favours rather than by economic forces
