Topic3 Flashcards
What is an externality?
An externality occurs when the production or consumption decisions of one agent impact the utility of another agent without compensation.
What is a negative externality?
A negative externality occurs when the effect is bad, e.g., pollution or noise.
What is a positive externality?
A positive externality occurs when the effect is good, e.g., vaccination or the smell from a bakery.
What is a production externality?
A production externality occurs when an agent’s production impacts others without compensation.
What is a consumption externality?
A consumption externality occurs when an agent’s consumption affects others without compensation.
What is the impact of negative externalities on market efficiency?
Negative externalities result in a higher amount of a good being provided than is socially desired.
What is the impact of positive externalities on market efficiency?
Positive externalities result in a smaller amount of a good being produced than is socially desired.
What is a Pigouvian tax?
A Pigouvian tax is a tax imposed to correct negative externalities by equalizing private and social costs.
What does the Coase Theorem state?
The Coase Theorem states that bargaining can correct externalities without government intervention if property rights are defined and there are no transaction costs.
What are public goods?
Public goods are non-excludable and non-rival in consumption, e.g., national defense or climate system.
Why do public goods lead to market failure?
Markets fail for public goods because of free riders who benefit without paying, leading to under-provision.
might need some clarification
What is the free rider problem?
The free rider problem occurs when individuals benefit from a good without paying for it, common in public goods.
What is the relationship between private goods and public goods?
- Private goods: Rival and excludable
- Public goods: Non-rival and non-excludable.
What are the assumptions of the Coase Theorem?
The Coase Theorem assumes:
- No transaction costs
- Perfect information
- Perfect communication.
What causes market failures?
Market failures arise due to:
- Monopolies or oligopolies
- Externalities
- Public goods
- Information asymmetry.
What is the prisoner’s dilemma?
The prisoner’s dilemma describes a situation where individuals act in self-interest instead of cooperating, leading to suboptimal outcomes.
How does government internalize externalities?
The government internalizes externalities through:
- Taxes on negative externalities
- Subsidies for positive externalities.
What is an example of a positive production externality?
An example is the cultivation of fruit trees, which improves air quality and prevents erosion.
What is a market optimum versus social optimum in externalities?
Market optimum ignores external costs/benefits, whereas the social optimum includes external effects.
What are private solutions to externality issues?
Private solutions include:
- Moral conventions
- Non-profit organizations
- Coase bargaining.
