Discovery Unit 14 Glossary Flashcards Preview

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Flashcards in Discovery Unit 14 Glossary Deck (25):
1

externalities

Present when a transaction impacts people who are not directly involved in the transaction (in other words, those who are モexternalヤ to the transaction).
They are unelected costs or benefits such as a neighborメs barking dog, noise from a nearby highway, or a visually appealing flower garden or landscape.

2

spillovers

Externalities that occur in market transactions and affect parties beyond those involved in such transactions.

3

negative externality

A situation where a third party suffers from a market transaction by others. If you hate roses, then being forced to look at the flowers from your house
every day would be a negative externality.

4

positive externality

Occurs when there is a positive spillover effect from a private market transaction. In this case, the demand or private benefit curve does not take into
account the full benefit of consumption. The total benefits to everyone involved, or social benefits, can be found by adding the external benefit at each quantity to the private benefit curve.

5

social cost

The costs to society when a good or service is produced, including private costs plus any external costs.

6

private cost

Those who are directly involved in producing a good pay the private costs of that production.

7

market equilibrium

The intersection of the demand curve and the private cost curve. This is the outcome predicted by the classical supply and demand model.

8

deadweight loss

Also known as the excess burden of a tax. Occurs when the best market equilibriums do not occur. One such case is when taxes are applied to a market.

9

socially optimal equilibrium

Occurs where the social cost curve intersects demand. This is the point at which the net social welfare is as large as possible and the market is
allocatively efficient.

10

net social welfare

Total net benefits minus total costs.

11

allocatively efficient

Occurs when the particular mix of goods being producedラthat is, the specific choice along the production possibilities frontierラrepresents the allocation
that society most desires. That unique combination will provide the greatest level of utility for society as a whole.

12

market failure

Occurs when a market fails to maximize net social welfare.

13

positive externality

Occurs when there is a positive spillover effect from a private market transaction. In this case, the demand or private benefit curve does not take into account the full benefit of consumption. The total benefits to everyone involved, or social benefits, can be found by adding the external benefit at each quantity to the private benefit curve.

14

private benefit

Those who are directly involved in consuming and producing a product derive private benefits from it.

15

social benefits

Total benefits to everyone involved.

16

network externality

The effects that users of a product or service have on others using the same or compatible product or service. Type of positive externality.

17

Command-and-control regulations

Require specific actions by market participants in dictating what they must or must not do.

18

internalize

Occurs when policies result in market participants considering the costs or benefits of externalities in their decision-making.

19

corrective tax

A tax imposed on the quantity of pollution that a firm emits. A corrective tax gives a profit-maximizing firm an incentive to figure out ways to reduce its emissions, so long as the marginal cost of reducing the emissions is less than the tax. While taxes create deadweight losses in otherwise allocatively efficient markets, a corrective tax actually eliminates the deadweight loss caused by the pollution externality. Also called a Pigouvian tax.

20

Pigouvian tax

A tax imposed on the quantity of pollution that a firm emits. A Pigouvian tax gives a profit-maximizing firm an incentive to figure out ways to reduce its emissions, so long as the marginal cost of reducing the emissions is less than the tax. While taxes create deadweight losses in otherwise allocatively efficient markets, a Pigouvian tax actually eliminates the deadweight loss caused by the pollution externality. Also called a corrective tax.

21

tradable permit system

Market-based solution to externalities that is mostly applied in cases of environmental pollution. Often referred to as a cap-and-trade system.

22

cap-and-trade system

Market-based solution to externalities that is mostly applied in cases of environmental pollution. Sometimes referred to as a tradable permit system.

23

corrective subsidies

Set of policy tools that governments can use to help markets internalize externalities.

24

property rights

Legal rights of ownership on which others are not allowed to infringe without paying compensation.

25

Coase Theorem

Observation that assigning ownership to either party in a property rights dispute will bring about the socially optimal outcome. Named for Ronald Coase,
winner of the 1991 Nobel Prize in economics.