8: externalities

Question 1

Externality

Answer 1

uncompensated impact of one person’s actions on the well-being of a bystander.
- It can be negative or positive, depending on whether impact on
bystander is adverse or beneficial.

Question 2

• Private benefits + external benefits = social benefits
• Private costs + external costs = social costs

Question 3

negative externalities

Answer 3

• implementation of tax (para mabawasan ang supply & demand
• shift curve to left
  *example nito ay pollution

Question 4

positive externalities

Answer 4

• subsidies (free programs)
• shift curve to right
  *example nito ay free education

Question 5

positive externalities 2

Answer 5

• Private value – the direct value to buyers
• External benefit- the value of the positive impact on bystanders

Question 6

PUBLIC POLICY
Command and Control Policies

Answer 6

• regulate behavior directly.
  Examples:
• Limits on quantity of pollution emitted
• Requirements that firms adopt a particular technology to reduce
  emissions

Question 7

PUBLIC POLICY
Market Based Policies

Answer 7

– provide incentives so that private decision-
makers will choose to solve the problem on their own.
Examples:
* Corrective taxes and subsidies
* Tradable pollution permits

Question 8

Corrective Tax

Answer 8

• tax designed to induce private decision-makers
  *Also called Pigouvian taxes after Arthur Piguo.
• The ideal corrective tax = external cost
• The ideal corrective subsidy = external benefit