Externalities (L17)

Question 1

externality

Answer 1

any positive or negative effect that a market transaction imposes on a third party (i.e. someone other than the buyer or seller - someone external to the market transaction)

Question 2

private welfare

Answer 2

utility level isolated to one individual within a society - actions that increase or decrease this quantity are said to have private benefits or costs

Question 3

social welfare

Answer 3

summed utility levels of all individuals with in a society - actions that increase or decrease this quantity are said to have social benefits or costs

Question 4

herd immunity

Answer 4

each vaccination protects not only the vaccine-recipient but also neighbors as well (classic positive externality)

Question 5

The Coase Theorem

Answer 5

resources will be used efficiently to maximize social welfare, even in the face of externalities, given conditions:

1. property rights are well defined
2. transaction costs or bargaining costs are sufficiently low

Question 6

Pigouvian subsidies and taxes

Answer 6

a subsidy or tax designed to “internalize” an externality by altering private costs and benefits