Externalities Flashcards
(20 cards)
What is an externality?
A benefit or cost that affects someone not directly involved in the production or consumption of a good or service.
What is market failure?
When markets do not allocate resources efficiently due to deviations from ideal market conditions.
What is the difference between private and social costs?
Private costs are borne by the individual or firm, while social costs include both private and external costs borne by society.
What is a negative externality?
When the social cost is greater than the private cost, e.g., pollution.
What is a positive externality?
When the social benefit is greater than the private benefit, e.g., vaccinations.
What is deadweight loss (DWL)?
The loss of total surplus due to inefficient market outcomes caused by externalities.
What are the four types of externalities?
Negative/positive externalities in production and in consumption.
What is the Coase Theorem?
Private bargaining can solve externalities efficiently if transaction costs are low.
Give an example of a private solution to externalities.
Contracts between beekeepers and fruit farmers.
What is the government’s ‘command and control’ method?
Regulations that ban or mandate specific activities to address externalities.
How do taxes address negative externalities?
They increase the marginal private cost to align with marginal social cost.
How do subsidies address positive externalities?
They reduce the marginal private cost or increase consumption to the efficient level.
What is a Pigouvian tax?
A tax imposed to equal the external cost of a negative externality.
What are tradable permits?
A system where firms can buy/sell rights to pollute, creating a market for pollution control.
What is the ‘golden rule’ for addressing externalities?
Move towards the quantity where MSB = MSC (allocative efficiency).
How do quantity restrictions solve externalities?
By limiting production or consumption to the efficient level.
What happens in a market with positive consumption externalities?
Too little is consumed; subsidies can increase it to the efficient level.
What happens in a market with negative production externalities?
Too much is produced; taxes can reduce it to the efficient level.
Why might private bargaining fail?
Due to high transaction costs or poorly defined property rights.
What does it mean to internalise an externality?
To ensure that external costs or benefits are reflected in market decisions.
