Externalities and the Tax System Flashcards
Uncompensated impact of one person’s actions on the well-being of a by-stander.
Externality
Impact on a bystander is adverse.
Negative externality
Impact on bystander is beneficial.
Positive externality.
Value to customers (price they are willing to pay)
Demand curve
Cost to suppliers
Supply curve
The demand curve reflects
value to buyers
The supply curve reflects
cost to sellers
absence of externalities
market equilibrium is in effect
the cost to society of producing a good
negative externality
social value curve is above the demand curve
positive externality
markets produce larger amounts than is socially acceptable.
negative externality
markets produce a smaller quantity than is socially desireable.
positive externality
protects inventor rights by giving exclusive use of their inventions for a period of time.
Patent law
Solution to externality
coase theorem
private parties can bargain without cost over allocation or resources. Can solve problems of externalities on own.
coase theorem
The uncompensated impact of one person’s actions on the well-being of a bystander
Externality
Impact on bystander is adverse
negative externality
impact on bystander is beneficial
positive externality
___ protects the interests of bystanders.
the government
the demand curve is the
value to customers
prices customers are willing to pay
demand curve
cost to suppliers
supply curve
equilibrium quantity and price
maximizes sum of producer and consumer surplus
