Module 1 (Part 2) Flashcards
(also known as spillover effects, side effects, or third-party effects) arise when some benefits or costs of an action affect individuals who are not part of the decision-making process.
Externality
This results in inefficiencies, as the total costs or benefits are not fully captured by the decision-maker.
Externality
a cost or benefit caused by a producer that is not financially incurred or received by that producer
Externality
Benefits that others enjoy without being part of the original transaction.
Positive Externality
Costs imposed on third parties who are not part of the decision-making.
Negative Externality
Externalities are not the main objective of the activity, but are by-products.
Incidental or Unintentional Effects of Externality
a way to deal with the tragedy of the commons
problem surrounding common resources such
as the environment (by suggesting that clear property rights can lead to negotiated solutions for the management of common resources, such as the environment. )
Coase Theorem
If the actions of one party (Party A) harm another party (Party B), then Party B can incentivize Party A to reduce or stop the harmful action.
Coase Theorem
asserts that those who cause pollution should bear the costs associated with managing that pollution to prevent damage to human health and the environment.
Polluters Pays Principle
also known as cap and trade
Emission Trading System (ETS)
a market-based approach to controlling
pollution by providing economic incentives for achieving reductions in the emissions of pollutants
Emission Trading System (ETS)
It operates as a tradable-permit system for greenhouse gas (GHG) emissions.
A cap is set on the total GHG emissions allowed, and companies must hold permits for their emissions.
Emission Trading System (ETS)
is a UN-run carbon offset scheme that allows countries to invest in GHG emissions-reducing projects in other countries and claim those reductions as part of their own emissions targets.
Clean Development Mechanism (CDM)
developing nations receive investment and support for sustainable development, while developed nations gain a flexible and cost-effective way to meet their emission reduction targets. This mechanism exemplifies how international cooperation can address global challenges like climate change while promoting sustainable development.
Clean Development Mechanism (CDM)
Incidental by-products can be turned into useful products.
Transforming External Effects into Joint Products
Resources can be protected by placing a price on their usage, ensuring more efficient and sustainable use.
Assigning Market Prices to Underpriced Resources
Firms can include external costs in their internal accounting by providing compensation or investing in public goods.
Substituting Internal Accounting Prices for Market Prices
Governments may impose taxes, fees, or grants to internalize externalities.
Using Fees, Charges, or Subsidies
Challenges in Internalizing Externalities
Property Rights Complexity and Difficult to Demarcate (set boundaries) Affected Areas
Three Ways on Evaluating External Effects
Compensating Variation (CV)
Equivalent Variation (EV)
Monetary Value of Externalities
-Sacrificing one or more things to gain something else.
-Involves considering all possible alternatives given up.
Trade-off
the loss of value or benefit that would be
incurred by engaging in that activity,
relative to engaging in an alternative
activity offering a higher return in value or
benefit;
Opportunity Cost
The value or return lost by choosing one option over the next best alternative.
Focuses on the specific benefit that could have been gained.
Opportunity Cost
the value of the next-highest-valued
alternative use of that resource
Opportunity Cost
