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Flashcards in M icro Part II Deck (9)
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1

externality

the uncompensated impact of one person’s actions
on the well-being of a bystander.

2

Externalities cause ___

markets to be inefficient, and thus fail to maximize total
surplus.

3

An externality arises when

a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect.

4

negative externality occurs when ____
lead markets to produce __

When the impact on the bystander is adverse.
Negative externalities lead markets to produce a larger quantity than is
socially desirable.

5

positive externality occurs when ____
lead markets to produce__

When the impact on the bystander is beneficial.
Positive externalities lead markets to produce a smaller quantity than is
socially desirable.

6

the social cost includes

the private costs of the producers plus the cost to those bystanders adversely
affected by the pollution

7

optimal output level

The intersection of the demand curve and the social-cost curve

8

Internalizing an externality involves ____

Internalizing an externality involves altering incentives so that people take
account of the external effects of their actions

9

The government can internalize an externality by

imposing a tax on the
producer to reduce the equilibrium quantity to the socially desirable
quantity.