11: Externalities

Question 1

finding efficient amount

Answer 1

MSB=MSC

Question 2

finding actual amount

Answer 2

MPB=MPC

Question 3

who continues to pollute despite a pigouvian tax or cap and trade system?

Answer 3

those for whom the permit is the most valuable (WTP > price of permit or tax)

if there are to be emissions, they should be made by those for whom it is most valuable

those who emit are systematically different from those that are shut out

Question 4

socially efficient allocation

Answer 4

MRSA=MRSB

Question 5

why are private decisions different from the social efficient amount?

Answer 5

each user doesn’t account for the external cost (or negative externality) to others of their use

each extra user typically reduces the value enjoyed by all other users

socially efficient amount accounts for effects on all parties

Question 6

how does a pigouvian tax work?

Answer 6

tax designed to correct an externality
- amount of money per unit that individual pays to make them account for the harm they impose on society

raising MPC at the efficient amount to match the true social cost, so each marginal user after the efficient amount no longer finds it worthwhile

forces an individual to internalise the externality - additional cost to make them account for the effect of their choice on others

Question 7

coase theorem

Answer 7

if property rights are well-defined and there are no transaction costs of bargaining, then bargaining to implement mutually beneficial trades ultimately brings us to a pareto efficient point

Question 8

externality

Answer 8

consequential impact of an exchange between a buyer and seller on a third party who is not part of the exchange

Question 9

tragedy of the commons

Answer 9

common property resource is one that belongs to ‘everyone’ so that it is non-excludable

Question 10

social cost

Answer 10

private cost (MPC) + external cost

Question 11

social benefit

Answer 11

private benefits (MPB) + external benefits