chapter 12 Flashcards
(8 cards)
what are externalities ?
positive and negative ?
the effect that an action of any decision maker has on the well being of other consumers or producers, beyond the effects of changes in price
in general the defining feature of an externality is that the actions of one consumer or producer affect other consumers or producers costs or benefits in a way not fully reflected by market price
Positive : if one agents actions have benefits for another party, the agent exerts a positive externality
negative : if one agents actions have costs for another party, the agent exerts a negative externality
what is MEC ?
marginal external cost, which rises because the incremental damage rises with pollution
MSC = MPC + MEC
what are property rights and why are they important ?
- another method to restore optimality
- the exclusive control over the use of an asset of resource without interference by others
they are important because normally manufacturers do not have to compensate anyone for releasing pollutants into the air. however if the community owned a property right to clean air then the firms would have to compensate them for the negative externality
what is the coase theorem ?
states that regardless of how property rights are assigned with and externality, the allocation of resources will be efficient when the parties can costly bargain with each other. efficiency is achieved regardless of who receives the rights.
however the distribution of resources very much depends on the property rights
describe a public good ?
public goods benefit all consumers even though individual consumers do not pay for the provision of the good
they have two characteristics:
NON RIVAL - when consumption by one person does not reduce the quantity that can be consumed by others e.g. public broadcasting , television
NON EXCLUSIVE - a good that no one can be excluded from consuming e.g. public parks, television
define
a. club goods
b. common property
a. lack rivalry but have exclusion
b. lacks exclusion but has rivalry
describe the efficient provision of a public good ?
this involves
- how much of a public good should be provided to maximise net social benefits
as long as the marginal benefit of an additional unit is at least as great as the marginal cost
the marginal benefit is the sum of the benefits of all the people who value the additional unit
what is a free rider ?
a consumer or producer who doesn’t pay for a non exclusive good, anticipating that others will pay
the free rider benefits without paying which makes it difficult for private markets to provide public goods efficiently
solution : social pressure, gov action , privatisation
