Module 4 Flashcards
What is an externality?
An externality is when the full cost or benefit of a good is not borne by the producers and consumers of that good. It represents spillover effects on third parties
What is a negative externality?
A negative externality occurs when a third party suffers from a market transaction, such as pollution from manufacturing
What is a positive externality?
A positive externality occurs when a third party benefits from a market transaction, such as the increase in property values due to well-kept gardens in a neighborhood
What are private costs?
Private costs are the costs that producers or consumers directly bear when producing or consuming a good
What are social costs?
Social costs include both private costs and additional costs incurred by third parties, such as pollution affecting human health
What is market failure?
Market failure occurs when the market does not allocate resources efficiently, often due to externalities
What is command-and-control regulation?
A policy that sets specific limits on the amount of pollution or requires specific technologies to be used for pollution control
What are market-oriented environmental tools?
Policies that create incentives for firms to reduce pollution, such as pollution charges, marketable permits, and better-defined property rights
How do external costs affect the supply curve?
External costs cause the supply curve to shift left, resulting in a higher price and lower quantity of production at the new equilibrium
How do pollution charges impact firm decisions?
Firms will reduce pollution if the cost of abatement is lower than the cost of the pollution charge, leading to more cost-effective pollution reduction
hat is a marketable permit?
A permit that allows a firm to emit a specified amount of pollution, which can be bought and sold between firms
How do property rights help address externalities?
Clearly defined property rights ensure that firms compensate for any damage caused, providing an incentive to minimize pollution
What are marginal costs of reducing pollution?
Marginal costs are the additional costs of reducing one more unit of pollution, typically increasing as pollution levels decrease
What are marginal benefits of reducing pollution?
Marginal benefits are the additional benefits of reducing one more unit of pollution, usually decreasing as the amount of pollution decreases
What is the optimal level of pollution reduction?
It is the level where marginal benefits of reducing pollution equal marginal costs, maximizing net benefits to society
How does a pollution tax differ from command-and-control regulation?
A pollution tax allows firms to choose how to reduce pollution based on cost-effectiveness, while command-and-control specifies methods and limits
What is the Coase Theorem?
It suggests that if parties can bargain without cost, they can reach an agreement to solve externalities on their own, regardless of initial property rights distribution
What are international externalities?
These are externalities that cross national borders, such as climate change, which cannot be resolved by a single nation acting alone
Why do marginal costs of environmental protection rise as more protection is provided?
Initial pollution reductions are usually cheaper and more effective, but later reductions require more expensive measures, increasing marginal costs
How do low-income countries view global environmental protection?
Low-income countries often prioritize economic development over environmental protection, viewing the latter as a luxury
What is a public good?
A public good is a good that is non-excludable and non-rival, making it difficult for markets to produce and sell to individual consumers
What does non-excludable mean?
Non-excludable means it is costly or impossible to exclude someone from using the good, making it hard to charge for it
What does non-rival mean?
Non-rival means that when one person uses the good, it does not prevent others from using it
What are social benefits?
Social benefits are the sum of private benefits and external benefits of a good or service, accounting for the overall impact on society
What is a free rider?
A free rider is someone who wants others to pay for a public good and then plans to use the good themselves, leading to potential underproduction
Why do private firms underinvest in new technology?
Private firms underinvest because they cannot capture all of the social benefits, making the private rate of return lower than the social rate of return
How do positive externalities affect demand for financial capital?
Positive externalities increase social demand for financial capital beyond private demand, as the benefits spill over to others
What is the socially optimal level of investment in innovation?
It is the level where the social rate of return equals the cost of capital, typically higher than the private rate of return due to spillover benefits
What is the role of intellectual property rights in innovation?
Intellectual property rights, like patents and copyrights, provide legal protection to inventors, allowing them to capture more of the social benefits of their innovations
How can government spending encourage innovation?
Government can directly fund research and development (R&D) in areas where private investment is insufficient due to high social benefits
What are tax breaks for R&D?
Tax breaks reduce taxes for firms based on the amount of R&D they conduct, incentivizing private investment in new technologies
What are cooperative research ventures?
Cooperative research involves partnerships between universities, the private sector, and government, pooling resources to spur innovation
Why do markets struggle to produce public goods?
Markets struggle because public goods are non-excludable and non-rival, allowing free riders to use the good without paying, reducing private incentives for production
What is the solution to the free rider problem?
The solution involves government intervention, such as funding public goods through taxation or social pressures that ensure contributions
Give an example of a quasi-public good.
A quasi-public good has both private and public characteristics, like subscription-based radio, which is excludable but non-rival once paid for
What is the “tragedy of the commons”?
It is the overuse of a common resource because individuals acting in self-interest do not bear the full cost of depletion, often requiring regulation
How does government intervention help public health programs?
Governments provide subsidies or mandates for vaccination to address positive externalities, aligning individual behavior with social benefits
Why is national defense considered a public good?
It is non-excludable and non-rival, as protection covers everyone regardless of payment, making it necessary for government funding
What are private vs. social rates of return?
Private rates of return go to the investor, while social rates include spillover benefits to society, making the latter generally higher
How does the free rider problem relate to public television?
Public TV overcomes the free rider problem through memberships, special perks, and partial government funding, encouraging voluntary contributions
