econ Flashcards
(28 cards)
externalities
the uncompensated impact of one person’s actions on the well-being of a bystander.
positive externality
beneficial side effect that affects an uninvolved third party.
negative externality
harmful side effect that affects an uninvolved third party
externalities and inefficiency
market equilibrium fails to maximize benefit to society
equilibrium quantity
maximizes sum of consumer and producer surplus. Maximizes efficiency in the absence of externalities.
social optimum
when marginal social benefit equals marginal social cost
social cost
private cost + external cost
optimum equilibrium (negative externalities)
left shift of supply, smaller quantity produced than market equilibrium.
internalizing the externality
altering incentives so that people take account of the external effects of their actions.
How can the government achieve optimal equilibrium in the presence of negative externalities?
tax to shift supply curve. Changes incentive of buyers an sellers.
optimum equilibrium (positive externality)
right shift of demand, larger quantity than market equilibrium.
How can government achieve optimal equilibrium in the presence of positive externalities?
subsidies to shift the demand curve. Changes incentives of buyers and sellers.
industrial policy
Government policy to promote and support individual firms which it considers are important for the growth of the economy. (incentivizes spillover of positive externality).
patent protection
property right/incentive to engage in economic growth associated with a positive externality.
command-and-control policy
regulatory strategy where government sets a requirement and then enforces individual and corporate actions to be consistent with meeting the requirement.
comand-and-control: regulation
requiring or forbidding certain behaviors. (regulations are scaled based on cost benefit analysis-prohibiting a behavior is not always feasible).
market-based policies
provide incentives so that private decision makers will choose to solve the problem on their own.
market-based-policy
corrective taxes and subsidies
corrective taxes (Pigovian taxes)
induce private decision makers to take account of the social costs that arise from an externality (tax or subsidy should ideally equal the cost or benefit of the externality)
regulation versus corrective tax
economists believe corrective taxes are more efficient.
market-based policy: tradable pollution permits
involve giving firms the legal right to pollute a certain amount.
pollution permits vs corrective tax
pollution permit sets the quantity of pollution allowed, and the demand curve determines the right to pollute. Whereas, a corrective tax sets the price of pollution which combines with the demand curve to determine the quantity of pollution..
the goal of economic analysis of pollution
to reduce the cost of a clean environment and therefore increase the public demand for a clean environment.
private solutions to externalities
moral codes and private sanctions, charities, relying on the self-interest of the relevant parties, and the relevant parties can enter into a contract.
