Externalities, property rights, public goods and the environment Flashcards
What is an externality?
the good or bad byproduct of some act of production
•Both positive and negative externalities impose efficiency problems.
•Externalities move the market away from an efficient equilibrium.◦Too much is produced with negative externalities.
◦Too little is produced with positive externalities.
•Key: Minimize the negative ones, promote the positive ones.
what is the Coarse Therom
if property rights are clearly defined, if externalities exist, and you have low transaction costs, two parties do not need a 3rd party to settle a dispute on an externality.
What is the cap and trade solution.
◾Cap: Limit on total amount of pollution in clearly defined area
◾Trade: Creating a market for pollution
see homework in regards to purchasing permits
why are property rights important?
- Basis for market solutions as well as for government or third-party solutions
- Necessary for knowing how to assign costs and benefits
what is a public good?
a good that is available to everyone regardless of who pays. It is non-rival and non-excludable.
what is a private good?
a good consumed by a single person - it is rival and excludable.
what is the concept of free rider
someone who benefits from a good but does not pay for it
What is Excludability?
◦Ability of firm to set up hurdles before good can be consumed, usually in form of price setting
what is Rivalrousness?
◦Rival in consumption: If one person is consuming a good, another person can’t
◦Nonrival: Can be consumed simultaneously
what is the tragedy of the commons?
because the individual benefit is greater than the cost of using a common resource, no one will stop consuming it until it’s gone - that then hurts the collective individuals.
