Week 9 (GPT) Flashcards
(46 cards)
What is an externality?
A cost or benefit from production or consumption that affects a third party not directly involved in the market transaction.
What are the four types of externalities?
Positive consumption, negative consumption, positive production, negative production.
Give examples of positive consumption externalities
Education, exercise, vaccination.
Give examples of negative consumption externalities
Secondhand smoke, loud music on public transport.
Give examples of positive production externalities
R&D, job training, tech innovation.
Give examples of negative production externalities
Pollution, overfishing, excess carbon emissions.
What is the Coase Theorem?
If rights are defined and there are no transaction costs, bargaining can lead to efficient outcomes regardless of who holds the rights.
Key assumptions of the Coase Theorem?
Defined rights, rational actors, low transaction costs, complete information, small number of parties.
Why doesn’t the Coase Theorem work in large markets?
Too many parties and high transaction costs make negotiation impractical.
What does it mean to internalize an externality?
Adjusting incentives so private actors bear the external costs or benefits.
What happens with a positive externality in a free market?
The good is underprovided relative to the socially optimal quantity.
What happens with a negative externality in a free market?
The good is overprovided compared to the socially optimal level.
How can governments fix a positive externality?
Offer subsidies equal to the marginal external benefit.
How can governments fix a negative externality?
Apply a tax equal to the marginal external cost.
What is deadweight loss in externality markets?
Lost surplus due to inefficient market outcomes.
How does a positive externality create deadweight loss?
From underconsumption of beneficial goods.
How does a negative externality create deadweight loss?
From overproduction of harmful goods.
What does Q* represent in externality analysis?
The socially optimal quantity where marginal benefit equals marginal cost.
What shifts in demand occur with positive externalities?
The social demand curve lies above the private demand curve.
What shifts in supply occur with negative externalities?
The social supply curve lies above the private supply curve.
What is marginal social benefit (MSB)?
Total benefit to society, including both private and external benefits.
What is marginal social cost (MSC)?
Total cost to society, including private and external costs.
What is a Pigouvian tax?
A tax used to correct negative externalities by internalizing the cost.
What is a Pigouvian subsidy?
A subsidy used to correct positive externalities by internalizing the benefit.
