Externalities Flashcards
(13 cards)
What is an externality?
An externality refers to the uncompensated impact of one person’s actions on the well-being of a bystander.
What is a negative externality?
A negative externality occurs when the impact of an action is adverse, such as air pollution from a factory or automobile exhaust.
What is a positive externality?
A positive externality occurs when the impact of an action is beneficial, such as vaccinations or restored historic buildings.
How do self-interested buyers and sellers affect market efficiency regarding externalities?
They neglect the external effects of their actions, leading to market outcomes that are not efficient.
In the absence of externalities, what can be said about market equilibrium?
The market equilibrium is efficient.
How does pollution from aluminium factories represent a negative externality?
The cost to society of producing aluminium includes both private costs and social costs due to pollution affecting bystanders adversely.
What determines the socially optimal quantity in markets affected by negative externalities like aluminium production?
The intersection of the demand curve and the social-cost curve determines this quantity, which will be less than the market equilibrium quantity.
How can governments help achieve optimal outcomes for markets with negative externalities?
By taxing producers (e.g., aluminium producers) for each unit sold, shifting the supply curve upward to reflect social costs.
What does “internalizing an externality” mean?
It means altering incentives so that individuals take account of the external effects of their actions.
Why does education represent a positive externality?
Because a more educated population leads to improved productivity and economic growth, benefiting everyone in society.
How does education’s social value compare to its private value due to positive externalities?
The social value of education exceeds its private value.
What determines the socially optimal quantity in markets affected by positive externalities like education?
The intersection of the supply curve and the social-value curve determines this quantity, which will be greater than the market equilibrium quantity.
In summary, what happens when there are negative and positive externalities in transactions between buyers and sellers?
Negative externalities cause socially optimal quantities to be less than equilibrium quantities; positive externalities cause socially optimal quantities to be greater than equilibrium quantities.
