Externalities And Market Failure

Question 0

What is internalising an externality

Answer 0

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

Question 1

Externality

Answer 1

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

Question 2

4 types of private solutions to externalities

Answer 2

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

Question 3

What is the coarse theorem

Answer 3

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

Question 4

Why do private solutions not always work

Answer 4

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

Question 5

Positional externality

Answer 5

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

Question 6

Positional arms races

Answer 6

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

Question 7

Public policies for externalities

Answer 7

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

Question 8

Pigovian tax

Answer 8

Tax to correct effects of negative externality

Question 9

Marginal abatement cost

Answer 9

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

Question 10

Public/private policies for externalities

Answer 10

Property rights

Control of positional arms races

Question 11

What are property rights

Answer 11

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

Question 12

Difficulties in establishing property rights

Answer 12

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

Question 13

Gov failure

Answer 13

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

Question 14

Public interest

Answer 14

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

Question 15

Public choice theory

Answer 15

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

Question 16

Rational ignorance effect

Answer 16

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

Question 17

Special interest effect

Answer 17

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

Question 18

Logrolling

Answer 18

The agreement between politicians to exchange support on an issue

Question 19

Rent seeking

Answer 19

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

Question 20

Cronyism

Answer 20

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