final Flashcards
externality
side effect on third party whose interest aren’t fully taken into account
- lead to market failure
negative externality
side effects that harms bystanders
- ex: car exhaust harm bystander who breathe it in
positive externality
side effect that benefit bystanders
- ex: you decide to get covid vaccine
(that decisions protect you and your classmate
private interest
cost n benefits you personally incur
- if ur choices dont affect others, private interest correspond w society
society interest
all cost n benefits, where they accrue to you or others
marginal private cost
seller extra cost to produce 1 more
(supply curve)
marginal external cost
extra cost imposed on bystanders from producing 1 more
external cost
cost seller impose on bystanders
marginal social cost
all marginal cost
marginal social cost = marginal private cost + marginal external cost
marginal private benefits
Buyer extra benefit from buying 1 more
(demand curve)
marginal external benefits
extra benefits enjoyed by bystanders from 1 more
marginal social benefits
all marginal benefits
marginal social benefits = marginal private benefits + marginal external benefits
socially optimal quantity
quantity that’s most efficient for society as a whole
rational rule for society
produce 1 more as long as marginal social benefit > marginal social cost
steps to analyze externalities
- predict equilibrium quantity to forecast what you think will happen
- asses what externalities are involves
- find socially optimal quantity
- compare equilibrium w socially optimal quantity
SOLUTION 1
solve externality problems
private bargaining & coase theorem
coase theorem
if bargain is costless & property rights are established, then external problems is solved by private bargain
SOLUTION 2
solve externality problems
corrective taxes & subsidies
corrective taxes
design to induce ppl to take account of negative externalities they cause
- set corrective taxes = to marginal external cost
-fix negative externalities
corrective subsidy
design to induce people to take account of positive externalities
- set subsidy = to marginal external benefit
SOLUTION 3
solve externality problems
cap & trade
- CAP (quota) negative externalities using quantity regulation
- increase efficiency by allowing TRADES
cap and trade proposal
Company have a cap on pollution permit (how much pollution they can produce). If they use little pollution permit, they can trade the extra permit to other company
SOLUTION 4
solve externality problems
laws, rules, and regulations
SOLUTION 5
solve externality problems
government support public goods