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Applications & Policy Issues > Externalities & Public Goods > Flashcards

Externalities & Public Goods Flashcards

1
Q

What is an externality?

A

An externality is the cost or benefit a third party receives from an
economic transaction outside of the market mechanism. ( SPILLOVER COSTS)

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2
Q

What is a negative externality?

A

Negative externalities of production occur when social costs are greater than private costs

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3
Q

What is a positive externality?

A

Positive externalities of consumption occur when social benefits are greater than social
costs.

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4
Q

Is price change an externality?

A

No

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5
Q

What is the marginal private cost?

A

The extra cost from one

extra unit paid by the seller

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6
Q

What is the marginal external cost?

A

The extra external cost

from one extra unit

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7
Q

Formula for. MSC

A

Marginal social cost = Marginal private cost +

Marginal external cost

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8
Q

What is MPB?

A

The external benefit

from one extra unit enjoyed by the buyer

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9
Q

What is an external benefit?

A

A benefit accruing to

bystanders.

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10
Q

What is a marginal external benefit?

A

The extra external

benefit from one extra unit.

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11
Q

MSB Formula

A

Marginal social benefit = Marginal private

benefit + Marginal external benefit

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12
Q

What is an external cost?

A

A cost imposed on bystanders.

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13
Q

What is the socially optimum output that is desirable to all parties?

A

Marginal social benefit = Marginal social cost

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14
Q

What is the 3 step recipe when analysing externalities?

A

Step 1: Predict the equilibrium outcome to forecast
what you think will happen.
Step 2: Assess what externalities are involved.
Step 3: Figure out what outcome is in society’s
best interests, and then compare this to the
equilibrium forecast from the first step

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15
Q

What are the 6 solutions to internalising an externality?

A
  1. Private bargaining and the Coase Theorem
  2. Fix the price: Corrective taxes and subsidies
  3. Fix the quantity: Cap and trade
  4. Laws, rules, and regulations
  5. Government provision of public goods
  6. Assign ownership rights
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16
Q

What is the Coase Theorem?

A

Coase theorem: If bargaining is costless, property
rights are clearly established and enforced, and
externality problems can be solved by private
bargains

17
Q

What can private bargaining help restore?

A

Private bargaining can restore the socially optimal

outcome.

18
Q

2 types of private bargaining?

A

Mergers and strategic investments

19
Q

What is a corrective tax?

A

A tax designed to induce people to take

account of the negative externalities they cause. Solves negative externalities

20
Q

What do corrective subsidies fix?

A

Corrective subsidies can fix

positive externalities.

21
Q

What is cap & trade?

A

Cap and trade: A quantity regulation implemented
by allocating a fixed number of permits, which can
then be traded.

22
Q

A cap and trade system is like a ….

A

A cap-and-trade system is like a corrective tax.

23
Q

What is a quota?

A

A limit on the maximum quantity of a good

or service that can be sold

24
Q

Corrective taxes, subsidies and cap & trade attempt to all do what ….

A

Both corrective taxes or subsidies and cap-and-trade
systems attempt to harness the power of the market to
solve externality problems as efficiently as possibl

25
Q

What are the 2 characteristics of public goods?

A

They are non-rivalry, which means that one person’s use of the good doesn’t stop someone else from using it
They are also non-excludable, meaning that you cannot stop someone from accessing the good and someone cannot chose not to access the good.

26
Q

What is the free rider problem?

A

A situation that arises when someone can enjoy the benefits of a good without
bearing the costs

27
Q

What is a rival good?

A

A good for which your use of it comes

at someone else’s expense

28
Q

What is a solution for a public good?

A

Club good: A good that is excludable but non-rival in

consumption. Example: cable TV

29
Q

What is a common resource?

A

A good that is rival and also

non-excludable.

30
Q

What is the tragedy of the commons?

A

The tragedy of the commons occurs whenever rival goods are non-excludable.

31
Q

How can you solve the tragedy of the commons?

A

Assign ownership rights to solve the tragedy of the

commons.

Applications & Policy Issues (2 decks)

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