Externalities And Market Failure Flashcards

0
Q

What is internalising an externality

A

Altering incentives so that people take account of the external effects of their actions

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1
Q

Externality

A

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

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2
Q

4 types of private solutions to externalities

A

Social norms of moral behaviour (advertising)
Charities (eg Greenpeace and environment)
Self interest
Social contracts

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3
Q

What is the coarse theorem

A

Proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

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4
Q

Why do private solutions not always work

A

Transaction costs
Bargaining problems
Coordinating interested parties
Asymmetric info and the assumption of rational behaviour

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5
Q

Positional externality

A

When the payoff to one individual is dependent on their relative performance to others

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6
Q

Positional arms races

A

Individuals invest in a series of measures designed to gain them an advantage but which simply offset each other

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7
Q

Public policies for externalities

A

Regulation
Pigovian taxes and subsidies (tax enacted to correct the effects of a negative externality)
Traceable pollution permits

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8
Q

Pigovian tax

A

Tax to correct effects of negative externality

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9
Q

Marginal abatement cost

A

Cost expressed in terms of the last unit of pollution not emitted (abated)

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10
Q

Public/private policies for externalities

A

Property rights

Control of positional arms races

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11
Q

What are property rights

A

An exclusive right of an individual, group or organisation to determine how a resource is used

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12
Q

Difficulties in establishing property rights

A

How do we apportion rights to air, seas, rivers, land etc

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13
Q

Gov failure

A

Situation where political power and incentives distort decision making so that decisions are made which conflict with economic efficiency

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14
Q

Public interest

A

Making decisions based on a principle where the max benefit is gained by the largest number of people at min cost

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15
Q

Public choice theory

A

Analysis of gov behaviour and the behaviour of individuals who intersct with gov

16
Q

Rational ignorance effect

A

Tendency of a voter to not seek out info to make an informed choice in elections

17
Q

Special interest effect

A

Where benefits to a minority special-interest group are outweighed by the costs imposed on the majority

18
Q

Logrolling

A

The agreement between politicians to exchange support on an issue

19
Q

Rent seeking

A

Where individuals or groups take actions to redirect resources to generate income (rents) for the,selves or the group

20
Q

Cronyism

A

Where the allocation of resources in the market is determined in part by political decision making and favours rather than by economic forces