Week 4: Externalities Flashcards
(24 cards)
What are externalities?
When an individual or firm produces something that directly affects others without affecting the market price
Can be positive (underproduction/underconsumption) or negative (excessive production or consumption)
What is a negative production externality?
A situation where a steel plant pollutes a river but does not face regulation
What is a positive consumption externality?
Vaccination against a communicable disease such as covid/measles
Define Marginal Private Cost (MPC)
The direct cost to producers of producing an additional unit of a good
What does Marginal External Cost (MEC) refer to?
Any additional costs associated with the production of the good that are imposed on others but that producers do not pay
What is Marginal Social Cost (MSC)?
MSC = PMC + MEC
Define Marginal Private Benefit (MPB)
The direct benefit to consumers of consuming an additional unit of a good
What is Marginal Social Benefit (MSB)?
The satisfaction experienced by consumers of a specific good
What is the Coase Theorem?
When there are well-defined property rights and costless bargaining, negotiations can bring about the socially optimal market quantity
Does the efficient quantity for a good producing an externality depend on property rights assignment?
No, it does not depend on which party is assigned the property rights
What are some limitations of private solutions to externalities?
- Property rights not clear
- Transaction costs
- Collective action problems
- Imperfect information
- Limited funds
- Holdout problem
What is a Pigouvian tax?
A tax set equal to the marginal external cost (MEC) of the activity
What is the purpose of subsidies in relation to pollution abatement?
To provide a subsidy equal to the difference between the MSB of pollution abatement and the firm’s MPB
What is a cap and trade system?
A limit is imposed on the total amount of a pollutant that may be emitted, allocated or sold to firms as emission permits
Define direct regulation.
Direct regulation is also known as ‘command and control’ and involves performance-based or input regulation
What are some issues with direct regulation?
- Information problem
- Costly monitoring and enforcement
- Regulatory capture
- Complex dynamics
What is polycentric governance?
Involves independent decision-making centers that interact through competition, cooperation, and conflict resolution
What role do trust and reciprocity play in economic models, according to Ostrom?
They are critical for effective cooperation in collective action
What are the five treaties governing outer space?
They define principles and governance of outer space, including the Outer Space Treaty of 1967
What are emerging problems in outer space?
- Objects in orbits
- Space traffic coordination
- Space debris
- Resource activities
Fill in the blank: The _______ is imposed on the total amount of a pollutant that may be emitted.
[cap]
True or False: The Coase Theorem suggests that externalities can be resolved without government intervention.
True
What is a holdout problem in the context of property rights?
Property rights in question are held by more than one party
What is the main criticism of Pigouvian taxes?
They may reduce incentives to reduce pollution in the future
